Managing a windfall

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A windfall, in personal finance, is defined as an amount of money that a person gets unexpectedly. Windfalls can range in magnitude from small additions to an individual's wealth to a significant increase in fortune. Since a large windfall almost invariably means huge changes in a recipient's life, psychological and emotional factors are often the most important factors determining outcomes.

Common sources of windfalls

  • Legal settlements : Settlements include personal injury settlements, settlements involving workers compensation and settlements of employment discrimination. Settlements are taken as either a lump sum or, alternately, as a structured settlement of annuity payments.
  • Inheritances: These can often involve retirement accounts and assets held in trust.
  • Gifts: These can range from annual gift exclusions up to the lifetime estate taxation credit limit.
  • Lottery winnings: Taken as a series of payments; or as the sales value of payments exchanged for a lump sum.
  • Insurance settlements: These can be in the form of death benefits received as either a lump sum or annuity; as pre-death cash surrender values; or as life settlements, the sale of a life insurance policy by the owner to a third party in exchange for a lump sum.
  • Retirement lump sums: Usually taken in lieu of a lifetime series of annuity payments
  • Sudden increases in income: These can come in the form of bonus payments; stock options; or cashing shares in an IPO. [1]

Other common sources of receiving large lump sums: [2]

  • A real estate sale
  • The sale of a business
  • Widowhood and divorce

Managing a windfall

  • Take your time
  • Determine your tax situation
  • Formulate a plan
    • Paying down debt
    • Retirement
    • Charity

See also

References

  1. CFP Study Guide investopedia
  2. Larimore, Lindauer, and LeBoeuf (2006). The Bogleheads' Guide to Investing. Chapter 15, p.180: Wiley. ISBN 978-0471730330.

Notes

External links