Most of the clients that we work with at Keen Wealth are prudent, reasonable and disciplined with respect to their retirement resources. Every so often we will come across a soon-to-be retiree who thinks that when they gain access to their retirement nest egg, they can just stop working and crack open their accounts like they’ve just won the lottery. This occurs more often with folks who haven’t had to commit to a lifetime of saving, investing, and planning, but instead may have earned a lump sum on their pension, earned corporate profit sharing, or came into an inheritance. In some of these cases, they look at their portfolio and see found money just waiting to be spent.
We’ve all read incredible stories about lotto winners riding high one minute and filing for bankruptcy the next. Retirees who want to avoid a similar fate have to resist the temptations of a “jackpot mentality,” and specifically these four mistakes that are common to lotto winners who hit the skids in a matter of months.
1. They spend too much too quickly.
We tend to adjust our spending habits to the amount of money we have available to us. So, while a nine-figure jackpot sounds like it will last forever, many overnight multimillionaires ramp up their spending so much that they tear through their fortunes in short order. Flush with cash and with the excitement of winning, they splurge on new cars, new houses, and private jets without thinking about the long-term costs of these assets (upkeep, insurance, taxes, etc.). And because the jackpot amount seems so huge, they figure they don’t have to worry about small monthly expenses anymore.
We try to keep our clients from sliding into this extreme end of the “reward mentality.” But we don’t want our clients to be so worried about running out of money that they live too conservatively either. A common strategy many of our clients use is to plan larger withdrawals and spending limits early in retirement when they’re still more active. By all means, if you can afford it, take big vacations while you’re able. Buy that Corvette or speed boat you’ve always wanted while you’re still driving. But make sure your spending plan will also keep you comfortable and cared-for once you and your retirement start to slow down.
2. They can’t say “NO!”
Lotto winners often find friends, relatives, very distant relatives, and mere acquaintances coming out of the woodwork looking for help, loans, investment partners, or just an outright cut of the jackpot. In some cases, winners have been harassed by people on the street who saw them on TV holding that big check.
Charitable giving and family support can be very fulfilling uses of your nest egg. But if you’re in a position to give, you also have to set limits. Discuss any sustained contributions you’d like to make to important causes with your fiduciary advisor and budget accordingly. And if you’re thinking about supporting an adult child or loved one in need, don’t be afraid to be tough. Ask questions so you know exactly how your money will be used and what the intended outcome will be. Make a contract. Set terms. Charge interest on repayment.
If your generosity jeopardizes your security in retirement, who is going to bail you out?
3. They don’t account for tax changes.
Whether they opt for the lump-sum payout or receive their money over time, many jackpot winners are so excited by their new financial freedom that they overlook one teeny, tiny little detail: the IRS! A big bump in income will cause a bump up to the higher tax brackets. A winner who quits his or her job and takes early retirement will see their whole financial picture change. Then there are the taxes to consider on big ticket purchases like real estate. Some folks just don’t understand what their tax bills are going to look like until they’re too big to pay. Others make poor decisions and try to hide assets from the tax man. Bankruptcies and legal issues often follow.
One big advantage of working with my Keen Wealth team is that we can help quarterback the whole of your retirement picture. We regularly help clients find reputable tax, estate planning, and health care professionals who can answer more specialized questions. Gathering all available information ahead of time helps us limit retirement surprises, like new taxes rates, for our clients.
4. They think having more money will make them happier.
As the issues discussed above begin to snowball, many jackpot winners struggle with depression, stress, and substance abuse. But study after study has shown that even winners who avoid serious wellness or financial problems don’t tend to be any happier than they were before their windfalls. Humans are great at adapting to their circumstances, even something as dramatic and potentially life-changing as a big lotto win. Once the reality sets in for these folks, it becomes just that: their reality. The shine wears off that new car, and it becomes just a car. The dazzle of a new mansion dims, and it becomes just a house. Working isn’t necessary anymore, so winners quit their jobs and… do what?
What these jackpot winners are running up against is the realization that money is not an end, but a means to living a better life. That’s such an important lesson for retirees to take in as well.
Our clients who have had to build their wealth by living within their means and delaying gratification have an invaluable perspective from that journey. They are more likely to be prudent with their resources and avoid the mistakes many lotto winners have made. They’re also more understanding of what kind of happiness money can and cannot buy.
At Keen Wealth, we always encourage our clients to think about the things they want to do in retirement, the places they want to visit, the people with whom they want to spend their time. Our checklist-driven process can help safeguard your financial future. The experiences that your nest egg can make possible are the real jackpot.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.