5 things a new millionaire should know

Shomari Hearn, CFP
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You’re just shy of age 60 when the retirement fairy hits and you get a windfall — a buyout at work, an inheritance, or you sell an investment for far more than you anticipated.

The money probably won’t turn you into Warren Buffett overnight, but it certainly could make retirement much more comfortable.

What do you do first?

Certified Financial Planner professional Shomari Hearn, vice president with Palisades Hudson Financial Group in Fort Lauderdale, Florida, offers this list of steps every new millionaire (or almost millionaire) should take:

  • Understand taxes. Most of the time, you can expect Uncle Sam to take his share. Even if there was withholding at work, it may not be enough to cover everything you owe. “People don’t think enough about this. When the accountant tells them that they owe money, but they have already spent it, then they have other problems,” says Hearn.
  • Consider wiping out debt. Paying off debt is a good use of a windfall, “especially, if it’s what I call bad debt — personal loans, credit card debt, high interest rate loans. Get rid of debt you don’t want to have when you retire,” Hearn says.
  • Feather your nest. Having cash will give you alternatives, especially if you plan to sell the home you live in now and buy something more suitable for retirement, Hearn says. “Selling the oversize family home and buying something smaller, especially in a tax-friendly state, could free up even more cash that you can incorporate in your retirement and tax planning.”
  • Invest for growth. Even if you feel like you have a comfortable cushion for retirement, low interest rates and rising health care costs can eat away at even a big nest egg. Smart investing can mitigate that risk.
  • Have some fun. Buy that Porsche you always wanted or take the around-the-world cruise, but before you spend more than about 10%, consider the overall impact on your retirement planning. “Identifying any percentage oversimplifes things,” Hearn says. “The trick is to make trade-offs before you go wild.”

The bottom line, Hearn says, is to get expert advice. Everybody who knows you’ve come into a little cash will be happy to give you their thoughts on how to spend it. But the smart thing to do is to get someone to help who can guide you away from shaky investment decisions and greedy tax collectors.

Here are 8 smart ways to spend a windfall.