PLANNING POINTS: The decisions that come with ‘new’ money

On a regular basis, situations arise where my clients are faced with the new responsibility of making investment decisions.

This can happen for many reasons, including money that has been inherited; a 401(k) rollover; exercised stock options; proceeds from a lawsuit; and even winnings from a lottery. A surviving spouse also faces this challenge when faced with the responsibility of making the financial decisions.

Although the reasons vary, the impact on a person is typically the same: a great deal of anxiety. A person goes from not having any major financial decisions other than maybe the monthly bills to the overwhelming burden of caring for the new financial responsibility.

Moment of arrival

Possible life-altering financial decisions need to be made, and the reaction to this new responsibility is not much different from the feelings and emotions parents experience with their first newborn: “I don’t want to make a mistake.”

Both situations can cause loss of sleep, irritability, anxiety, indecision and an overall sense of confusion.

Parents typically have the advantage of knowing this new “burden” is coming and have time to prepare, as do clients in most situations. But in both cases, the moment of “arrival” can be overwhelming.

Some cases can be particularly emotional and challenging, such as when the beneficiaries of an inheritance are not aware of the inherited amount or a spouse dies suddenly. This can be somewhat intimidating for a person who has not managed large lump sums of money previously or made major financial decisions.

I have seen emotions run the full spectrum in these situations: giddiness, bewilderment, crying, hyperventilation and denial. All of these emotions are completely normal.

The important thing to do in these situations is to take a step back and identify your priorities and determine what your biggest fear is concerning the money.

Again, people’s biggest fear in these situations is: “I don’t want to make a mistake.”

Because this often is the primary thought, they tend to avoid making decisions and can sometimes become paralyzed. Honestly, as long as taxes are paid in a timely manner, along with the monthly bills, this approach is acceptable for a while, providing it is not neglected for an extended period.

Slow down

Things to remember during the process that will help alleviate the new burden: Slow down. Other than the payment of any taxes and monthly expenses, do not allow yourself, or others, to force deadlines upon you for decisions.

The only decisions that must be made are ones that have legal deadlines. Most long-term financial decisions do not carry a sense of urgency. As with a newborn, crawl first. Slow everything down.

Identify possible tax ramifications you may face with your decisions. This includes potential estate and income taxes, including distributions from retirement plans, annuities, trusts and other asset sales that may create a taxable event. Gather all relevant information before taking any distributions or selling any assets.

Analyze your current financial situation: evaluate your debts and monthly cash flow needs. Take inventory of your 1) checking account; 2) “rainy day emergency account” and 3) investment/ retirement accounts. Become familiar with your monthly expenses, income and overall budget.

Understand the implications when selling an asset or spending money. Where did the money come from? Was it investment income, principal, paycheck or pension?

The eventual goal in any financial situation is to become comfortable and not allow the new responsibility to control your emotions and day-to-day life.

If the situation allows you to do so in advance, educate yourself on your options. Interview professionals in the legal, investment and tax area. Make a list of questions and concerns and share it with your advisers. Create a plan by identifying your income needs, return and risk expectations and a “wish list” of things you would like to do in the future.

What are your priorities?

Implement your plan

Take the next step: Implement your plan at your own pace. Ask for help and guidance and don’t attempt to make all the decisions at once. Missing an opportunity is more prudent than wishing you could retract a long-term financial decision.

Does the new financial situation allow you to do some things you have always considered but never been able to do? Possibilities include funding a retirement account, taking a trip with your family, running your own business, and countless others.

These are all investments, but their purpose varies as does the type of return. Matching your priorities along with realistic expectations will lessen the overall burden of any new financial situation.

The goal is to manage your new financial situation in a way that allows it become an ally and positive resource … not a burden.

Pete Alepra is managing director-financial adviser with RBC Wealth Management. Comments: (319) 368-7023; peter.alepra@rbc.com. Investment and insurance products offered through RBC are not insured by the FDIC or any federal agency, are not deposits or guaranteed by a bank and are subject to investment risks.