Winning a big injury case may not be everything that your clients expected.
Sudden wealth—whether from a settlement, inheritance or lottery—isn’t all that’s it’s cracked up to be. About 70% of people who win a lottery or get a big windfall actually end up broke within 7 years, according to the National Endowment for Financial Education.
People who win the lottery are twice as likely to file for bankruptcy every year than the general population (winning the lottery doubles your chance of bankruptcy).
- 78% of NFL players are either bankrupt or under financial stress within 2 years of retirement,
- 60% of NBA players go bankrupt within 5 years after leaving their sport,
- Mike Tyson earned $400 million over his boxing career, but declared bankruptcy in 2003.
(March, 2009, Sports Illustrated, “How (and Why) Athletes Go Broke”)
Despite these scary statistics, our clients swear that, “That will never happen to me” and I almost always respond, “Oh, yes, it will.” No one expects that they will out-spend their $—in some cases millions of dollars—but it is (almost) inevitable. Just like lottery winners, settlement recipients overcome big odds if they somehow manage to preserve their recovery.
The Curse of Sudden Wealth
There is no difference between those who come into sudden wealth from a personal injury settlement, lottery winners and pro athletes—none of them are prepared for what they will face. Family and friends will come out of the woodwork with heart-felt pleas for new houses, cars and “temporary loans”.
Studies show that money does not buy happiness. Lottery winners experience extreme happiness after winning, but their happiness levels quickly change.
You would be blown away to see how many winners wish they’d never won.
Edward Ugel, “Money for Nothing”
Bankruptcies, divorce, family troubles and mental health issues, including suicidal ideation, come along with winning the lottery (2006 Study in the Journal of Health Economics). Dave Ramsey claims that the divorce rate among lottery winners is four-fold the national average.
Why This Problem Exists
The large majority of settlement recipients have no experience with $ and have no financial sophistication—they are completely unprepared for managing a large sum of money. There are no classes or seminars for financial management for settlement recipients. Settlement recipients have a higher risk of bankruptcy simply because of a lack of control within the spending process and little focus on long-term investments.
The vast majority of [lottery] winners want nothing more than to have their old life back.
Edward Ugel, “Money for Nothing”
To make things worse, settlement recipients are highly vulnerable due to their lack of financial sophistication. Their family and friends know about their lawsuit and expect to get their cut of the $. With so many friends and family seeking a payoff, the temptation to buy the most expensive houses and cars is hard to resist.
Most lawyers make the mistake of giving settlement recipients their money and sending them on their way with little, or no, financial advice. This is a recipe for disaster. Instead, ask your clients to review and sign a document that sets forth your best advice for avoiding financial catastrophe.
Our Top 6 Tips for Avoiding Financial Catastrophe
Thank you for the opportunity to serve you.
Our experience has been that our clients—just like lottery winners—will spend their money as quickly as they can and regardless of the amount of money, they are often broke within one to two years. This is a sad and frightening reality…but it doesn’t have to be this way.
When warned that settlement recipients almost always blow through their $ in record time, our clients typically have the same response, “That won’t be me.” And I (almost) always respond, “Oh, yes, it will.”
Your #1 goal should be PRESERVATION OF CAPITAL. These are our Top 6 Tips for Avoiding Financial Catastrophe.
#1: Pay Off All Debts
First, eliminate all of your debts, including mortgages and car loans. Having zero debt protects you from the peaks and valleys of your investments.
#2: Create a Budget
Keep your spending under control and create a barebones budget. Shaquille O’Neal spent a total of $875,015 each month, including $24,300 for gas and $17,220 for clothing (according to the Palm Beach Post from a cancelled divorce filing in 2008)
Don’t tell anyone about your newly found wealth and do not make promises to family members or friends.
#3: Hire a Trusted Team of Financial Advisors
Hire a trusted team of financial planners who are trained in advising settlement recipients, specifically, a certified financial planner who only represents settlement recipients.
Don’t just keep your money—increase it. The power of letting your money work for you through the power of compounding. NBA legend, Magic Johnson, built a net worth of over $500 million through a number of restaurants and small minority-owned businesses in Magic Johnson Enterprises.
If the stock market goes down 50% (as it did during the financial crisis from 2007 to 2009), you won’t have a second chance. Settlement recipients only have one chance to make the right decisions.
#4: Put the $ in a Structured Settlement Preservation Trust
Create a monthly income for the rest of your life in a Structured Settlement Preservation Trust. A trust is a “job you can’t get fired from”, says Tim Denehy, Certified Financial Planner with Forge Consulting.
Take the money in annual payments rather than a lump sum. The interest rate on an annuity will suck, but the goal is PRESERVATION OF CAPITAL. If you make mistakes the first few years and lose all of your money, you have plenty of time to get it right. There are also tax advantages to taking the money over time, as the settlement recipient will not get taxed on the appreciation of the annuity.
#5: Stay Married (or Get a Prenuptial Agreement)
Avoid divorce at all costs. In divorce proceedings, husbands routinely lose half of their net worth. NBA legend, Michael Jordan’s divorce settlement cost $168 million.
#6: Become a Student of the Ultra-Rich
We are giving you a book that should be mandatory reading, Thomas Stanley, Ph.D.’s book, “The Millionaire Next Door”. According to studies, the typical millionaire does not inherit the money or have a genius idea that makes them rich overnight. The average millionaire is frugal, saves his/her money, invests conservatively and over time, his/her money grows from relatively small amounts into millions.
We can learn from Warren Buffett, the richest man in the world. Warren Buffett lives in a modest, middle-class home in Omaha, Nebraska and lives the same lifestyle that he had when he had no $. With billions of dollars in savings and assets, Warren Buffett refuses to spend because he knows that needless spending on expensive “stuff” will diminish his wealth. You should strive to have Warren Buffett’s approach to saving and living frugally.
I’d wish you luck, but luck will have nothing to do with preserving your money and growing your wealth.
Please initial this document and sign where indicated to acknowledge your receipt of our best advice.
Dated: March 2, 2017
John H. Fisher
photo credit: ccPixs.com Crossroads: Invest or Spend via photopin (license)