MaxOut Savings Show Report

With Ted Geoca & KNTH 1070AM

MaxOut Savings Advisors, LLC

5/09/2008

SAVE AGGRESSIVELY AND INVEST CONSERVATIVELY!!!

The Seven Step Plan

Handling a Financial Windfall Successfully

We recently had wealth consultant Cynthia Kostas from Houston, Texas back as a guest on the MaxOut Savings Show on 1070KNTH to discuss the many ways of dealing with sudden wealth be it be IRA rollover at retirement, an inheritance or winning the lottery.  Cynthia has been able to combine her financial experience, an MBA from University of Texas and a theology degree from Holy Cross Greek Orthodox School of Theology into a unique program for understanding how to deal with wealth.  We had quite a bit of interest and thought it would be a good idea to send out our MaxOut Savings Report on the Seven Step Plan again as it was one of our most popular reports last year.

Wealth is generally received in two ways either through long-term savings buildup or a sudden windfall of wealth.  Most of us are working on long-term savings buildup through our retirement plans.  We know how to save and invest for retirement with varying degrees of expertise.  We use an income-based savings program (payroll deduction) to achieve our retirement goals.  What we are often not prepared for is how to handle a sudden windfall of wealth.

This windfall can come in many forms through inheritance, selling a property or business, settling a lawsuit, winning the lottery and insurance policies.  All of these can result in a sudden financial windfall that brings a new set of challenges in addition to the many positives.  The old adage that “with wealth come responsibility” is not just a call to giving something back, but a charge regarding how to handle wealth overall.  It is a challenge suggesting that if you are not responsible with your new found wealth it may soon be gone.

Many Lose It All

Studies have shown that 35% of lottery winners declare bankruptcy within 10 years and that does not include a good percentage of people who lose most of their wealth.  There are four basic reasons people lose windfall wealth.  These losses are often the result of poor planning and being unprepared emotionally to handle wealth.  People who have built wealth slowly have had time for their emotions and habits to develop to catch up to their wealth.  With sudden wealth this is not the case and the emotional fallout can be destructive.  Emotions come into play in many ways, with relatives and friends investment ideas or pleas for charitable donations.  In addition, it is often hard for people to handle how they should live when they suddenly find themselves rich.  If you are not emotionally grounded and don’t have a plan, the wealth will make your life difficult.  The key to your success is to recognize this and deal with it emotionally and plan your transition of the wealth.

The Seven Step Plan

Wealth consultant Cynthia Kostas helps people develop skills to manage life and money when they receive overnight wealth.  She has developed seven steps to handling financial windfall after years of working with individuals, families, trusts and foundations.

• Realize that you alone are responsible for these funds and your financial wellbeing.  Stay involved, read, and learn about financial matters. 
• Step back take time to emotionally adjust and understand your new situation.
• Choose your path.  What do you want for your life? Who do you want to be?
• Figure out your financial position.  How much do you have? What are your current living expenses and what is your income? Is it enough to live on and do what you want to do, as identified in #3?
• Slowly and thoughtfully assemble your team of advisors and gatekeepers.

·         Estate lawyer

·         Investment Manager

·         CPA

·         Wealth Consultant

6. Create a Financial Plan with your team.
7. Implement your plan.

Owning Responsibility

Resist the temptation to abdicate control or responsibility for your new found windfall.  While it may seem easier at first to hand the funds over to someone or a group and say, “you take care of it”, in the long run, staying involved with your financial health is of paramount importance.  Embrace this as an opportunity to learn in a new area.  Seek the advice of others with credentials and expertise, but stay in the decision making process.  Use your common sense.  Over time, you will be able sort out those you can trust and those whose advice is sound.  Seek out and listen to the team you ultimately choose, but stay in the driver’s seat.  Money is like electricity; it can be a powerful source for good or for destruction.  Exercise your good judgment.  You can handle this if you take care and watch out for certain pitfalls.

Step Back

We recommend that our clients and friends do nothing for three to six months with their funds except put them in an interest bearing highly liquid vehicle.  People who have earned money slowly over time have the time to adjust to their changing financial position.  Give yourself the same privilege.  Windfall wealth comes with strong emotions.  Sometimes we feel guilty, or have mixed feelings about the source of the windfall.  Sometimes we have to face our own stereotypes and prejudices about people who have money, now that we do.  Emotions and decisions about money are a lethal combination.  Chill a little.  Give yourself time for your emotions to adjust to your new situation.

Choose your Path

A good use of your “chill time” is to consider what is important in your life.  Who do you want to be?  How would you like to impact your world?  Have you always wanted to quit working or does your work provide a meaningful sense of purpose and social resource for you?  Have you wanted more time to serve a cause, help your children with college or return to school yourself?  Now is the time to envision the place you would like to serve in your life.  These values should guide your plans for your windfall.

Take Stock of your True Financial Position

The “chill time” is also an excellent time to write out and assess your current financial condition.  List your assets: the amount in your bank accounts, brokerage account, IRA or other retirement accounts, and any real estate you may own.  Make a list of your debts, including credit card, student loan, and mortgage debts.  Go through your checkbook and credit card statement to list exactly how much you are spending, by category, if possible, to sustain your current lifestyle.  List your income, netting out social security, taxes, Medicare expenses, and contributions to retirement vehicles.  Most people find this to be an enlightening exercise and can help them set some immediate priorities.  It often provides the reality check needed when facing a large sum of money.

Advisors and Gatekeepers

Assembling a team of advisors is particularly important as these will be the people who guide you through the management of your wealth.  You can begin asking the wealthy people you know—your boss, the owner of your company, someone you may know through your place of worship, etc.—about advisors who they work with and trust.  Most wealthy people hire advisors such as estate attorneys, wealth consultants, and investment or portfolio managers.  Get a number of recommendations.  Interview these people.  Take your time to find people who both have a good professional reputation and who share your values and who you click with.

An investment manager will handle the investing of your assets for the long term to meet your objectives, whether they are for long term growth or income.  The investment manager will be familiar with all asset classes, their risk/reward tradeoffs, and understand how they work together in your overall portfolio.  The portfolio manager should be able to explain this to you as he recommends the purchase of stocks, bonds, or other investment vehicles.  An estate planner or wealth consultant should guide you through the planning process to reflect your values and goals, help you ascertain them, recommend an overall plan, budget, will plan, and show you about vehicles like the various kinds of trusts, charitable vehicles, and insurance vehicles that would help you reach your goals with tax efficiency.  The wealth consultant should also be able to advise you on the various ways your assets can be protected from lawsuit, divorce, and other life challenges.  An estate attorney should review your plan and draw up the legal documents.  Your CPA can prepare the needed tax returns and forms to comply with federal and state regulations.  All professionals should coordinate with one another.  The wealth consultant can orchestrate the coordination, but always keep you in the decision-making position.

Advisors can also serve as gatekeepers for your assets.  Trusts can be set up that restrict the use of funds.  Also, they can play the role of “bad guy” in declining requests for loans, hand-outs or funding “investment opportunities” that you do not really want or in which you cannot really afford to get involved.  In this capacity, they provide an excellent solution to a very common problem that most people with funds have: the urgent solicitations of family, friends, or charities who would like you to fund their pet projects.  An advisor can help you sort through the requests and speak on your behalf, if that would make you more comfortable.  They may be able to steer you away from making some decisions that are purely emotional and might redound to your long term detriment.

Selecting your team with care requires time, referrals, patience, good questions, and good intuition.

The Plan

Your team will be able to run scenarios to let you know how long your funds will last at various spending rates, so you can prioritize your goals.  They can project the funds you need to set aside for retirement, college, or other goals.  They will make suggestions on how to best structure your funds to achieve your goals and protect your assets.  This is a good time to set a budget for charitable giving—both for organizations and for family and friends.  This kind of plan will help you address solicitations.  Your investment plan will include how much income you need, how much risk you are willing to take for the return you need, and asset classes with which you are comfortable.  A large investment plan can often take a year to implement, so you do not need to invest in everything at once.

Implementation

When you are comfortable with your plan and understand it and the trade-offs involved, it is time to implement it.  Your advisors should guide you through this process.

Problems

Now, let’s turn to some of the most common problems that accompany windfall wealth.  On our radio show, Cynthia Kostas shared several stories of lottery winners who won millions and ended up on welfare within 10 years.  In her own practice she has observed five major causes of severe and unanticipated loss, which we detail below.  One of the overarching vulnerabilities of people who come into money is that they often feel isolated.  They cannot easily share the challenges they face with their friends because their friends cannot really relate, often responding, “Yeah, I wish I had your problems”.  Feelings of isolation often push people to make decisions based on winning friends or approval or proving that they are still nice guys, though wealthy.  Here again is where an objective and good advisor can help you sort out the reasons behind your decisions and gently remind you of the objectives, values and priorities you originally set out.

Pitfall #1: Overspending

Everyone has pent-up demand—a wish list—of what they would like to buy if they could afford it.  Now is the time to enjoy a luxury that you have been thinking about, like a European vacation, new car, or swimming pool.  Such dream items should definitely be included in your initial plan, or budget.  A problem occurs when people think that they are rich and therefore should live out their vision of how a rich person lives.  The problem is that this vision is usually an illusion based on Hollywood.  Books like “The Millionaire Next Door” reveal that truly wealthy people live well beneath their means, investing for their future rather than living flamboyantly.  Discern between needs and wants.  It is easy to get caught up in our consumer society that tells us things and experiences equate to happiness.  In fact, spending is an addiction in our society of plenty.  And, like any addiction you need more and more to get less and less satisfaction.  This is a common trap into which many folks fall.  Some solutions include:

·       Consider what brings you satisfaction and what really brings joy into your life.  Make a list.  Most of the items cannot be bought.  Revisit this list when considering your wish lists.

·       Remind yourself that there will always be those who spend more than you and those who spend less than you.  Living your priorities, not someone else’s is living with integrity.

·       Remember God.  Appeal to your higher being as you understand him, to guide your values and help you adjust with honor and integrity.

·       Stay emotionally independent.  Read and engage in activities that nourish and strengthen you.  Nourish or engage your spirit.  That is where happiness lies.

·       Here again, it is your plan and your advisors that can keep you on track.  Having taken stock of what you have and what you want to spend it on and how long it will last at different levels of spending provides the reality check that can help you avoid this pitfall. 

Pitfall #2: Bad Investment Decisions

Bad investment decisions have been the ruin of many wealth windfalls.  People like to talk about their investments and they mostly talk about the good ones.  So when talking to successful people, one gets the idea that they are all great investors and it is easy.  Warren Buffet is one of the few investors willing to talk about failures he has experienced because he is confident and wants to learn from them.  That is what makes him a good investor.  Most businessmen and successful investors draw on the wealth of 20-30 years of mistakes from which they have learned to get where they are today.  Always remember you could be wrong and find investment counselors to back up your position.  Now that you are suddenly wealthy is not the time to start an investment learning curve.  Find good people as advisors and invest conservatively.

Pitfall #3:  Solicitations from Friends and Relatives

Many times family members will come to you with what they consider to be great business ideas that they have been wanting to try or with legitimate medical needs or financial difficulties such as debt that can be solved with a loan from you.  This is a heart-wrenching dilemma because they touch us on a very emotional level.  We suggest that you carefully examine the need that is being presented to you.  Choose which people you consider to be in your innermost circle.  Budget some percentage of your windfall to help such cases and stick to the budget so that your own goals do not get subverted by the troubles of loved ones.  Family issues are complicated and multi-layered.  Consider the following:

·       Set aside the dollar amount or percentage of your windfall that you are willing to spend on family members in true need.  Stay disciplined to this figure.

·       If possible, do not share the news of your windfall with others.

·       Do not get caught in the trap of trying to make all things equal.  You cannot equalize financial aid to family members any more that you can equalize love.

·       Differentiate another’s wants from needs from emergencies.  If a relative or friend has an ongoing problem making ends meet, paying a bill will not help them in the long run.  They need to make lifestyle adjustments to match their income.  This is different from a sudden accident that leads to sudden unemployment.

·       Make clear the limits of your help from the beginning. 

·       Help relatives find other solutions to their dilemmas in addition to or instead of money.  What other sources of help are available for their situation?  Can you help them budget or find social services?

·       Draw a tight circle around your definition of friends that you would include with family members as being worthy of your financial assistance.

·       Remember that getting someone in further debt (to you) often is not doing them any favors.  A one-time infusion of money often does not provide the solution, but is only a bandaid.  When the money cannot be paid, or is not paid, relationships are strained, often irreparably.

·       Evaluate any business that you are asked to invest in as you would any other investment.  One out of every three start up businesses fails within three years.  Seek evaluation of the business plan (be sure there is one!) from a professional.

·       Others may not wish to borrow money, but to control your windfall by controlling access to you from friends and advisors.  Sometimes they may wish to create a feeling that you are dependent on them.  Or, they may want to gain social status through association with you.  (“He or she will listen only to me.”) Beware of anyone who tries to convince you that everyone else who might advise you is an imbecile or a cheat and that they are the only ones that you can trust.

·       Of course we all want to help our loved ones when they are in need.  All people have emergencies throughout the course of their lives.  Being aware of the pitfalls can keep your good intentions from going sour.

Pitfall #4: Solicitations from Charities

You will become a target for charitable appeals from organizations that are very professional in their approach.  Often, development professionals will build friendships with you with this goal in mind.  You will find these friendships flattering and appealing, so your emotions will be involved, and your attachment to attention will influence you.  Of course there will be causes about which you feel passionate.  Many of these causes are worthy of your support.  Consider the following:

·       Prioritize which causes are most important to you.  Who will you support this year and next year?

·       Determine what dollar amount or what percentage of your income or wealth you are able to give away and still remain a responsible steward to yourself and your family.

·       Set criteria for a charitable organization to merit your money.  What percentage of their budget goes to the actual cause and what goes to administrative and solicitation costs?  Will they work with you on a particular cause you are passionate about, like research for a particular cause, or a building for a particular purpose?  Will they remain accountable to you, the donor, for the use of your money?  Are they stable?  Do they have a long-standing record of keeping their word on the use of donor’s money?

·       Stay disciplined to this predetermined plan and criteria.

·       Learn to say no.  Use the phrase, “this does not fit into my charitable giving plan at this time.”

Pitfall #5: Bad Habits

The other day on the MaxOut Savings Show, wealth consultant Cynthia Kostas shared many stories of lottery winners losing their windfall to gambling habits and drug and alcohol use.  Part of the emotional fallout of windfall wealth is that it brings up issues that are painful for us.  People anesthetize their discomfort with drugs or the adrenaline rush of gambling or other habits.  This happens so often that it bears mentioning in this column.  Being aware is part of the battle.  Seek counseling or other means to support you through the tough issues that sudden wealth often makes you face. 

For many people, a financial windfall has been more of a curse than a blessing.  Taking care, thinking through your own motivations and those of others, and seeking professional and experienced guides can help you navigate a shift in financial circumstances to enhance your life.  If you have a question for Cynthia Kostas, email her at info@maxoutsavings.com.

MaxOut Savings Advisors is an SEC registered investment advisor.  As fee only based advisors we charge an annual fee to manage your portfolio investing in stocks, bonds and no-load mutual funds.  We use Fidelity Investments to handle the custodial and brokerage services for our clients.  If you would like MaxOut Savings Advisors to manage your IRA Rollover or Trust we would be happy to sit down and meet with you.  If you would like to meet with us or have a question please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com.

Remember Save Aggressively and Invest Conservatively!

Ted K Geoca

President

MaxOut Savings Advisors, LLC

Houston, Texas

ted@maxoutsavings.com                                 713-627-0400