You are sitting on a Saturday or a Wednesday night watching the TV with your Lotto ticket in hand not expecting much to happen. Suddenly, the numbers come in and you have a winning ticket in your hand. You have hit it big time.
If this is not you, then you have probably read a story of someone, or have heard of someone who has won the lottery only for them to lose a substantial amount of that money within two years of winning it. The statistics in this regard are surprisingly high.
Where to from here?
Let’s go back to the original scenario. So, you’re sitting with your ticket to the high life, but you want to make sure that this life is not short lived. What do you do with the money? FAnews spoke to Mark MacSymon CFP (Financial Planning Institute Financial Planner of the Year - 2017) to find out what he would do with the new-found wealth if he won the money.
“For the purposes of this exercise let’s assume I won R15 million. I would immediately settle my bond and purchase, over the course of about a year, a portfolio of commercial and residential properties that would be roughly 75% leveraged,” said MacSymon.
Paying off a bond sounds like good advice and is probably something that most people would do. But what happens then? Would MacSymon stop working?
“I would continue to work as a wealth manager and continue to make optimal annual contributions to a retirement annuity. I would use R1 million to start an outdoor adventure-related business with a group of like-minded people. Thereafter, I would position the balance of assets, about R9 million, in a growth-oriented mix of assets; 35% offshore equities, 40% local equities, 10% local and offshore listed property and 15% in quality corporate paper and/or bonds,” said MacSymon.
Advise to others
The above information, while sound advice, is the path that MacSymon would follow if he won the Lotto. What advice would he give clients who came into such money either through the Lotto or through an inheritance?
“Client needs and objectives vary from goal to goal, and certainly across various time horizons. However, while being cognisant of the idiosyncratic variations of client’s financial plans, the overall idea and advice prescribed above would be similar to the advice I would give to some clients. Pay off expensive longer-term debt and if possible, use debt more sensibly from an asset acquisition perspective. I would then advise clients to invest in private businesses which have special meaning or resonate with them as an investor and this will in turn generates another income stream for them,” said MacSymon.
He then added that he would advise clients to invest the balance of their wealth in growth-enhancing assets with some pockets of concentration. Further, clients need to use some of the income generated from that portfolio to support their vision for their future. This will vary from person to person.
Missed opportunities
We still haven’t answered the question as to why most people who come into money, either through winning the lottery or by way of inheritance, seem to not be able to make their money last.
While each situation is different, MacSymon presents his views on why this may be the case.
“My intuition tells me that most people who win the lotto find themselves financially destitute a few years after because they simply spend their winnings on things which lose value over time. These people unfortunately fail to plan and of course as a consequence, plan to fail,” said MacSymon.
Critical advice
Advice is critical for those who benefit by way of a windfall such as a large inheritance or winning the lottery. MacSymon pointed out that a second reason as to why beneficiaries of large cash windfalls might fail to allow for the capital to last over their lifetimes and onto the next generation is because they undertake gifting or donation activities when they’re not yet in a position to do so.
“Yes; it is critically important to give, to share the money and to donate to people and to charities, but the time to do so is once your personal finances are in order and it is possible to donate in a sustainable manner as opposed to a once-off bequest,” said MacSymon.
Editor’s Thoughts:
At the end of the day, advice is personal to the financial planner and to the client. Providing advice when coming into money is important because financial planning is a process and not an event. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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