A windfall is a sudden — and often unexpected — influx of money received all at once. While most people automatically think about winning the lottery, a windfall can happen from a variety of sources, including a divorce decree, a legal settlement, or an inheritance.
Because a windfall is usually a single chunk of money, it often disappears quickly. Think about all the lottery winners who go broke within a short time. The key, then, to making the most of that windfall is to find a way to keep it working for you.
How can you do that when you receive only one big check? The answer is by using that check to turn the money into a lifelong monthly paycheck. Here’s how anyone can do that.
Buy an Annuity
An annuity is a financial investment tool where you contract with an insurance company to receive periodic payments for a number of years in return for a lump sum (or certain payments) given to them now. Because they invest the money, the provider generally offers a higher rate of return than you often get with products like bank accounts or mutual funds.
Annuities come in two basic varieties: immediate and deferred. If you want to make use of this windfall right away — as most recipients do — then you can opt for an immediate annuity. A deferred annuity is great for those who are planning ahead for retirement.
Choose the Right Risk Factor
Annuities can be paid in the form of a fixed monthly check or a variable one based on market performance. If you want to make your windfall last as inflation continues in the upcoming years, a variable annuity may be the right option. However, if you’re close to retirement and care less about long-term inflation, a fixed annuity provides a stable amount of money per month or year.
Once you begin receiving checks on a regular basis, you’ve turned that one-time large windfall into a small but manageable amount of money in your pocket each month. You can spend it or you can save it each month, but you won’t be able to blow your entire windfall on one crazy purchase and end up flat broke.
Take leftover money from monthly checks and reinvest it into an account that will continue to grow. Now your windfall improves your daily life in the present and creates a cushion for the future. If you opted for a variable annuity, set aside more money from months when payments are larger. By setting aside unused funds each month, you also have the ability to give yourself a raise as inflation rises.
Create an Income Stream
Finally, use those annuity funds to create an additional income stream that will complement — or even outlast — the windfall. For instance, purchase a rental unit and use the annuity check to pay the monthly costs. Reinvest rent checks back into the fund until you need to begin drawing from that source of income, perhaps upon retirement.
You can create a secondary income source with your monthly annuity check in many ways. You could start a side gig using a skill you already have. You could fill in your education gaps in order to boost your salary. Or you could invest in someone else’s business. The possibilities are only limited by your risk tolerance and your interests.
At Tax Deferred Benefits, LLC, we help our clients plan for a long and prosperous future. Make an appointment today to see if an annuity is right for you. And then you can begin enjoying your windfall without worrying about it running out.