We all dream of receiving a windfall, but watch out for ‘sudden wealth syndrome’, writes Jane Olsen.
A young couple sipping cocktails and relaxing on a tropical beach ask each other if winning Powerball has changed them, to which they conclude that it hasn’t because they still need to check the weather.
It’s a scene that plays out in the latest commercial for a lottery and the inference is that winning Powerball will in fact radically improve your life: you won’t need to work, you’ll be carefree and your only concern will be the weather.
But in reality, coming into a lot of money – whether it’s through an unexpected windfall; the sale, or partial sale, of a business; inheritance; or divestment of property – dramatically changes people’s lives and not always for the better.
Sudden wealth often comes with an emotional toll – stress, anxiety, guilt, social isolation and confusion. It’s an affliction American psychologist Stephen Goldbart termed “sudden wealth syndrome”. The co-founder of the Money, Meaning & Choices Institute, says sufferers become overwhelmed, grow suspicious of people around them, and make poor decisions, such as overspending or lending money to family and friends. A common outcome is personal and financial destruction.
Melissa Weinberg, research fellow at Deakin University’s Australian Centre on Quality of Life, uses a physiological metaphor as to why sudden wealth causes discomfort.
“Happiness is like body temperature. There’s an optimal level,” she says.
While a person’s body temperature may periodically rise or fall due to conditions such as fever and hyperthermia, the human body is designed to revert to an optimal temperature.
Similarly, human beings have an inbuilt, optimal level of happiness which they default to, Weinberg says.
“When a person’s level of happiness deviates from their standard default position, either positively or negatively, for a meaningful period of time, they become distressed, which explains why many people who become suddenly wealthy are uncomfortable and unhappy,” she says.
According to the Australian Unity Wellbeing Index, a measurement conducted by Australian Unity and the centre, wealth is one of seven factors contributing to a person’s subjective happiness or satisfaction. The other six are health; sense of achievement; relationships; connection to community; feeling of safety; and future security.
For those swamped by totally unexpected wealth, such as lottery winnings, relationship damage can be a particular risk. While wealth may not change who a person is, it can often change their needs.
How to deal with sudden wealth
Coming to grips with sudden wealth can be daunting, agrees ANZ financial planner Robert Hayward, who has seen several clients suddenly come into money. His one key comment is that seeing an advisor can help guide decisions that protect the new money so it lasts beyond the recipient's initial high.
Case in point is one of his clients, a woman in her early 60s who worked in retail and won about $5 million in a Lotto syndicate she’d taken out with her workmates. Not everyone she worked with was in on the syndicate, which made going to work particularly uncomfortable for the winners. However, the win meant she could pay off her mortgage, quit her job and set some of her family members up for the future.
“The biggest thing for her was dealing with all the extra zeros in her bank account; just trying to comprehend that level of money was a massive challenge,” Hayward says.
“She was getting things thrown at her from left, right and centre. So seeking that professional opinion helped her understand what level of income support she needed to support herself long-term and to direct the money into the investment solutions that allowed for that. Our role was taking that weight – that burden, if you like – away from her when it came to making big decisions about where the money goes.”
In a situation like this, you’re not just dealing with the Lotto winner, but the whole family. Hayward also had meetings with her children to explain how the money was being invested, and why, and still meets with her regularly to make sure everything stays on track.
“She didn’t particularly care about getting a better rate of return; she just wanted to protect the capital,” he says. “A Lotto win doesn’t come around very often. Others in the syndicate went down a very different path and spent the money on travel and other luxuries, but she took a very sensible approach to make sure it could support future generations.”
It's good to keep in mind that the odds of winning the lottery are miniscule, the majority of sudden wealth comes from the sale of assets, inheritance or insurance payouts. This can be very substantial amounts and just as daunting.
One of Hayward’s other clients is a young woman who was pregnant with her second child when her husband passed away unexpectedly. She was a stay-at-home mum, making her husband the sole breadwinner. Fortunately, on his advice, they’d taken out life insurance the month before so she was protected to the tune of $700,000.
“It meant she could support her two young kids,” Hayward says. “She paid off the mortgage and put a couple of hundred thousand into a managed investment to provide an ongoing income on top of the Centrelink support she was receiving.”
Risk and reward in wealth transfer
Baby Boomers currently account for around 25 per cent of the population but more than 55 per cent of the nation’s private wealth, according to McCrindle Research. The households of Australians over 55 currently own a combined $2.8 trillion and over the next two decades will pass much of this on to younger generations. This is expected to reach $3 trillion by 2020.
The enormous intergenerational transfer of wealth from Baby Boomers (and their parents) to the next generation can be broadly split into two categories: business and personal.
According to KPMG’s Family Business Survey 2015, up to 72 per cent of the family businesses surveyed will undergo some form of ownership change in the next five years, with 64 per cent intending to pass ownership solely to family members.
But while many people dream of receiving an inheritance, those who have often describe it as the worst thing that has ever happened.
Money and wealth has the ability to tear families apart, evidenced by well-known cases such as the Rinehart and Wran families and the bitter battle between tyre king Bob Jane and his son Rodney.
However, money doesn’t have to be a destructive force. In the majority of cases, passing on an inheritance is a wonderful, loving gesture which gives the benefactor great joy and is greatly appreciated by beneficiaries.
With early engagement, open communication and careful estate planning – preferably with all parties involved, wealth can be smoothly and tax effectively transitioned from one generation to the next.
A professional adviser can also provide ongoing advice around goal setting, portfolio management and asset allocation. This is critical given beneficiaries typically have no experience managing large amounts of money so they’ll need a guide to help them avoid impulsive, destructive behaviour; and ensure they invest their inheritance wisely so it lasts.