What do you do when your stock goes IPO? How do you protect your gains when your stock surges in price? How do you manage your restricted stock units or stock option sale? When you have an event that leads to a large influx of money, be prepared.
80% of retired NFL players go broke in their first three years out of the League.
The term “sudden wealth syndrome” is real. It’s defined on Wikipedia to cause individual stress for multiple reasons after coming into a large sum of money after their IPO went public, winning the lottery, or other sudden money windfalls. In an article titled, Wealth in an IPO can cause employees to go by Susan Hauser in Workforce.com December 7, 2011 “The impact of money on people, whether they gain a lot of it or lose a lot of it, is powerful,” Goldbart says. “The less prepared an individual is for a sudden liquidity event, the more impact it’s going to have.”
Sudden money doesn’t have to be stressful; if you’ve prepared ahead of time, know what it means to you, and received professional help in how to manage the windfall event. Let’s discuss a few smart ways to use your restricted stock sale, IPO, or a sudden influx of money, so that you don’t become the next statistic of sudden money going broke.
When consulting a new client on a sudden money event, we begin with “What makes you happy?” We emphasize a lifestyle and push people out of the box – less concentration on material items and more concentration on how they would live their lives (eg. Start your own business, do more charity work, travel around the world, etc. ) The deeper you color this illustration, the more we have to work with when we put your money to work for you.
Tip #1 – When your stock goes public or you come into a large amount of money, it can be very tempting to consider all the things you can buy with it. Instead of imagining all the things you could buy with the money, imagine how you would find happiness if you didn’t have to grind out a paycheck every day in a demanding job.
How is it that these famous athletes go broke three years out of NFL? When you no longer receive a paycheck and you’ve spent your money buying a big home, traveling, enjoying a fancy yacht, and a cool sports car, you don’t have the cash to maintain these items. Big items are expensive to upkeep. You will have heating or cooling expenses on a large home, pool maintenance, property taxes, boat docking fees, expensive auto mechanics and parts replacement on your foreign made cars, and more. You need to have a steady inflow of cash to maintain these items. If you’ve spent most of the money buying these goods, how much have you left over to maintain them? The same money issues you have working at your job to cover all your bills before sudden money are still there after a sudden influx of money has been spent. Only now, your money worries are bigger because your expenses are larger.
Tip #2 – When planning what to do with your money, consider how much income you can make in perpetuity with the windfall and plan your expenses around the income the money can make instead of spending the principal. This is how the “smart money” does it. Foundations and pensions don’t run out of money, because they only spend the interest, not the principal.
This is the hard one. It will be painful, but you will have less risk if you take the tax bite and move forward. I once spoke with someone who came in to a large sum of money from an IPO. She had decided to sell what she needed to provide an income to last a lifetime without having to work. The rest of the stock was held in a concentrated position for her to see if she could “let it roll” and get bigger. It was a good thing she did this because a year later that additional 8 million dollars of stock ended up totaling about $200,000 when finally sold. It is now 15 years later and she is still so grateful to have sold what she needed because she continues to live off the portfolio income from the original proceeds.
Taxes are complicated. Do I need to say this again? Many sudden windfalls such as selling stock options and restricted or IPO stock will create not just capital gains tax but additional taxes when it comes to your income. Don’t do this alone. Consult an experienced tax professional that knows corporate stock rules and regulations.
Tip #3 – Have a tax professional estimate your taxes and put away the required money to pay Uncle Sam come April the following year.
This is the fun part. What will you do when your money works for you? Determine whether you want to go at it alone or get help. Do you have the time, experience, interest or inclination to manage your money? Do you have the knowhow to make sure this money will last you a life time? If you answered no to any part of these questions, seek help. You will save money in the long run by NOT making mistakes if you hire the right advisor that has experience developing income streams to last a lifetime. One of the major symptoms of Sudden Wealth Syndrome is the stress of losing money, but it doesn’t have to be.
Tip #4 – Implement your plan. When you have illustrated the life you want to live happily, plan a budget around that life with the appropriate level of income you can have net after taxes. Put that money to work. Once it’s working for you, you can enjoy your money’s paycheck as long as you live within your means.
The next time someone asks you what would you do if you won the lottery or received a sudden influx of money. Ask first, how much money net after taxes will it give me? And then, what kind of income can I get from it?
For me personally, I’d send my money to work every day and live off my money’s hard earned paycheck. I’d create a lifestyle that allows me to live and give according to my values. I would be financially independent, and I’d have financial happiness.
At TechGirl Financial we have all the resources for you to plan the lifestyle, and the budget. We put your money to work for you, and we continue ongoing management to keep you on track so you don’t overspend. Instead of constantly chipping away at the principal, there’s a better way to work your money. Live off the income.
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*Forbes Feb 9, 2015 5 Reasons Why 80% Of Retired NFL Players Go Broke