It’s a sad story. The lottery win. Followed by a spending spree. Followed by bankruptcy within a couple of years. Tragic. And very avoidable.
Overnight wealth can come from a variety of sources: an inheritance, the successful sale of a company, exercising a stock option and, of course, a lotto bonanza. There’s even a psychological term for it: sudden wealth syndrome. It’s an expression invented by Dr. Stephen Goldbart, a psychologist and founder of the Money, Meaning & Choice Institute in California.
Coming into wealth
Paul Brent, writing in The Globe and Mail ROB (May 1, 2017), examined the subject in some detail, publishing his findings in an article called Coming into wealth. While acknowledging that ‘cash windfalls are a nice problem to have’ Mr. Brent went on to discuss a few of their alarmingly negative consequences.
He interviewed Kurt Rosentreter, a certified financial planner with Manulife Securities in Toronto, who reportedly worked with three lottery winners and said: ‘Sadly, all of them found their way to me about a year after they won.’
According to Mr. Rosentreter: ‘Two of the three had less than half of their multimillion-dollar wins and had made pretty much every wrong decision: all had gone on spending binges before creating a financial plan; all had decided to retire before figuring out whether it was economically possible.’
Resist the urge to spend
Lottery winners are not alone. The literature of sudden wealth syndrome is littered with examples of individuals, and families, who totally mismanaged their good financial fortune. It ruined their friendships, distorted their family relationships and – most particularly – derailed the emotional equilibrium of their children.
The impact of sudden wealth highlights one of the oldest adages in wealth management: failure to plan means planning to fail. This means that if you don’t have a wealth advisor, get one. Or, if you have a trusted advisor, go see him/her pronto. Lay out the facts. Discuss the scope of the challenge. Roll-up your sleeves. Get to work. Most important of all: resist the urge to spend. You have plenty of time for that.
The above summary, as Mr. Brent reports, ‘is the default position of most financial advisors who encourage people to take a breath and then get down to planning what to do with that sudden cash pile before spending it.’
A dissenting view about spending
Fascinatingly, Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, takes a dissenting point of view on spending. He says:
‘Our first general tip that we give people if they have a sudden inheritance, a windfall, lottery win, depending on the size obviously, is to take some of that money and spend it right away. That will sort of get out the urges, the impulse to do something crazy.’
For Jamie Golombek, that splurge might consist of 5 – 10% of the newfound wealth, spent on something like a dream vacation or coveted automobile. As for the rest of the money, he advises people to put it into a short-term guaranteed investment vehicle creating a ‘cooling off period’ during which the money will be safe.
Be discreet and expect the worst
Instructive though Paul Brent’s article is, it only scratches the surface of the sudden wealth syndrome – and its possible personal and psychological consequences. If those who come into money suddenly are not extremely discreet about their good fortune, they can become victims of family members and friends, thieves and charlatans – and even charities – all of whom are inclined to prey upon moneyed novices.
Eileen Gallo, a psychotherapist in Los Angeles and a columnist for the Journal of Financial Planning, spent two years studying people who had hit the jackpot through initial public offerings of stock, lotteries or unexpected inheritances.
She found that half of them spontaneously wanted to talk about the money’s impact on sibling relationships, and that nearly all said the effect had been negative. She concluded that many family members feel envy or an astonishing sense of entitlement about a relative’s new wealth, expecting handouts or permanent financial support.
It’s all about you
We have no wish to be negative or didactic. But the impact of overnight wealth, even to those of us who are apparently stable and sane, can be dislocating – not least to the relationship you have with yourself! The potential for personal impairment that sudden wealth brings, according to many experts with credible experience on the subject, can be catastrophic.
Our advice: Come to terms with yourself before you start enjoying the benefits of sudden wealth or you may live to regret it.
The Wooding Group at CIBC Wood Gundy, 780-498-5047