So You’ve Had a Windfall…Now What?

Sometimes we get lucky through an inheritance, a tax refund, a gift, or even winning a lottery or pool. The downside is that we have to figure out what to do with the cash. In such a situation, where do you start?

Understanding how to prioritize your financial goals is important. You might be inclined to splurge on a luxury, invest in a new home, pay down debt, or save up a cushion of cash for future emergencies. Which is the best option?

In most cases, you’ll want to save first to ensure you have an emergency stash of cash in place.

After all, having paid down your student loans isn’t going to provide much comfort when you lose your job and can’t afford your rent.

Beyond a minimum level of essential savings, priorities will differ depending on your life and your goals. Luckily, there are questions you can ask yourself to ensure that you’re doing the right thing with your windfall.

For example, is your debt load worrisome because of its level or interest rate?

If so, you may want to apply the spare cash to paying more than the monthly minimum payments. Just be sure to think about how best to eliminate debt among various sources.

For example, do you pay off one credit card or pay a little on all?

Also consider whether the cash would be best used to invest more in your 401(k) plan. If your employer offers a match and you’re not getting all of it, you may want to take advantage of the “free” money by contributing more.

It may also be wise to think about whether you have enough insurance, meaning health insurance, life insurance, long-term disability insurance, and liability insurance, in case something goes wrong.

Finally, remember there may not be a “best” decision. It’s not a one-size-fits-all situation; however, professional advice can help.

Gambling With Your Retirement Is a Risky Business

The 2016 Retirement Confidence Survey report, based on interviews with 1,000 workers and 505 retirees and recently released by Employee Benefit Research Institute (EBRI), contains some surprising information.

According to Jack VanDerhei, EBRI research director and coauthor of the study, many Americans who haven’t been saving enough are taking a “particularly risky gamble.”

That’s because almost 40% of workers say they need to save at least a fifth of their current income to retire comfortably. But workers aren’t saving much; the retirement savings percentage peaked in 2009, and today fewer than two-thirds of workers save for retirement. Perhaps worse still, 42% of workers (and 27% of those age 55 or older) have less than $10,000 in savings and investments.

And many underestimate their future retirement expenses, such as food, taxes, and health care. How will these workers plan for tomorrow? Some 20% say they’ll save more later, 15% say they’ll work in retirement, 14% say they’ll retire later, and 13% just “don’t know.” As VanDerhei notes: “Better than one in four either [has] no idea what they’ll do or they’re just hoping they can, in essence, defer the pain.”

VanDerhei is particularly concerned about workers who believe they’ll work longer. According to the survey, 67% said they expect to work for pay after they retire; but in fact, only 27% of retirees do. The EBRI survey found that 50% of retirees had to retire earlier than expected, usually because of their health or their spouse’s health. “I view that,” he says, “as a particularly risky gamble.”