Most people probably have heard the story.
Someone wins a lottery, gets a large inheritance or becomes hugely successful and comes into a large amount of money. They might quit their job or buy a big house, take exotic trips, spend their money on expensive cars, clothes or jewellery and really live it up. They drop out of sight until a few years later when you hear they’ve gone through all their money and are broke.
Sudden wealth may sound like a blessing but it can cause some very real problems.
Sudden wealth syndrome (SWS) is a term that has been coined and used by psychologists to refer to adjustment problems that affect people when they come into large sums of money. Suddenly going from being an average working “Joe” to a wealthy, privileged individual can cause stress and an identity crisis with symptoms that include feeling isolated from former fiends, guilt over their good fortune and an extreme fear of losing their money.
Many Canadians could be finding themselves in this type of situation.
A Quebec couple, for example, recently won the $55 million lotto max jackpot. Many Canadians may have come in to a lot of money recently by selling their houses and cashing in on the hot housing market (particularly in Vancouver and Toronto) or selling the businesses they have spent their lives building.
As well, Canadians between 50 and 75 are poised to inherit an estimated $750 billion over the next decade, the largest intergenerational transfer of wealth in Canadian history.
Coming into sudden wealth raises a serious question – are you ready to handle the responsibility of this new-found money?
“Generally people tend to act too quickly when they come into a large sum of money,” says Marie Phillips, a wealth adviser with IPC Securities Corp. “It’s a behavioural response that can be similar to losing a loved one – you don’t know what to do with yourself so you do something just to control the uncontrollable.”
Some people will take steps to protect their personal privacy by changing their address to a post office box number and getting an unlisted telephone number to ward off individuals and/or organizations who may see opportunities in their new-found wealth.
Phillips recommends people stay calm, soberly reflect on their situation and what is important to them, their families and communities, and surround themselves with a network of trustworthy professionals such as accountants, planners and lawyers who can advise on tax, insurance, inheritance and other matters.
If you have some debt such as a mortgage you probably want to pay if off as soon as possible and top up or maximize contributions to your Registered Retirement Savings Plan and/or your Tax Free Savings Account.
If you are thinking of quitting work, you need to decide what you’re going to do with all your new spare time. What do you want to do that is going to give your life a sense of purpose?
And then there can be a myriad of financial decisions to make. Although your inheritance money and/or lottery winnings might be tax free, once you invest or save it and start earning on it, you pay tax on it.
“You may also want to change the risk tolerance of your investments,” Phillips says. “Capital preservation may be a more prudent approach – ‘I have so much money why do I need to invest to get more and worry about market fluctuations and risk.’”
“The key is not to act in haste but to take time and decide what is going to give you a sense of purpose and whether you are going to be a reaper or a steward of that wealth,” Phillips adds.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.