RECEIVING a Lump Sum
In almost every instance that I’ve seen, a lump sum payment is attached to the passing of someone close or a payout due to a significant injury. Although you may have a large sum of money on the way, it’s often bitter sweet at best. These are some of the biggest innocent mistakes that I see people make when they receive after tax lump sum payouts:
Paying off all debt
Buying a home cash
Quitting a long term job before qualifying for a mortgage
Buying depreciating assets
There may be a place for some of the above things AFTER you have assessed your current scenario and future goals to make sure you’re making the wisest and most informed decisions possible. I will say tho that paying off all debt is frequently the worst and most catastrophic decision made without planning that I encounter in terms of managing lump sums. Meeting with people to discuss what to do with the leftovers is far more common than I like to admit and many times it’s gut wrenching on this side of the table. Common consensus is NOT specific to your scenario nor is internet wisdom and family advice. Period. Invest in the time to review your plans before the money comes and it will save you from well intentioned but long term irreversible wealth cannibalizing decisions.
The reality is that between now and 2025 there’s over $750 billion transferring to baby boomers aged 50-75 in Canada with BC having the highest average inheritance (source). So the likelihood of receiving a lump sum from some source in the next 20 years is actually quite high if you’re under 55. In many instances the people receiving these lump sums will not have a relationship with their parents’ financial advisor (because “Silent Generation”) and they will have been at the bottom of the barrel in terms of service levels at large institutions because of their small account sizes. Is that your experience? That’s precisely why I prefer to deal with clients that have investment accounts under $500k as they can usually benefit from my service and advice the most and are the ones getting the least at national institutions. My clients are prepared and well informed before the lump sum hits their account. At the very least they know to make a plan specific to their circumstance before hand.
If you’ve received a lump sum and done some of the above it’s okay. It’s entirely possible they were great moves for your scenario. If they weren’t it’s still okay, there is still a lot more planning to be done moving forward that you can benefit from. My comments are relative too. You’re never going to go backwards paying off debt compared to where you were before the lump sum. But it can be far less beneficial than some alternatives you have when you are looking at all the options on the table with a lump sum that you never had before.
Just remember, it’s unlikely that you will ever receive an after tax lump sum like this again in your lifetime. So just like buying a home, treat the decision with as much attention as it deserves. Talk to a professional. It really is a once in a lifetime opportunity.