Make the most of a jackpot, and be smart with debt and retirement plans

IT pays to be smart, and secretive, with an unexpected windfall, writes Scott Pape.

Scott Pape says nothing good will come from telling people that you’ve won lotto.

DAVID ASKS: My partner and I are both aged pensioners and we have just been confirmed as sharing a 1st division prize in lotto which we never, ever expected. Having worked and tried to make ends meet all our lives — and not done the correct thing with money — we do not want to make that mistake again. We are scared. What should we do?

BAREFOOT REPLIES: I’ve helped quite a few lotto winners over the years and I’d say that fear is a totally natural, healthy emotion to be feeling right now. Here’s what I’d do in your situation:

First, don’t tell anyone.

Second, seriously, don’t tell anyone. Trust me on this: nothing good will come from telling people that you have won the jackpot.

It’ll make at least some of your friends envious, and it could cause your kids to plot to “granny grab” their inheritance, rather than living their own lives.

(Speaking of which, seek out a lawyer to create an estate plan for you. Ask them about setting up a testamentary trust so you can have more control over who ends up with your loot.)

Third, since your winnings will be tax free but the earnings on them won’t be, talk to an accountant about the most tax-effective structure for investing.

Hopefully you’ve paid off your home, so I would suggest you splurge a little (keep it under the radar), give some away, put some aside for emergencies and put the rest into good-quality shares.

Given you’re already retired pensioners, you’re not going to be able to put the money into super, and this windfall will affect the amount of Centrelink pension you get. But who cares, right? You’re rich!

MEANING OF LIFE

MARK ASKS: My wife and I are 40 and we (almost) own our home, with a mortgage of $70,000 on a house worth about $900,000 about 10km from the CBD.

She works part time and I, due to a near-death experience, do not work, so I look after our child.

We have $70,000 in super and no credit card debt. After nearly dying I feel deeply grateful to be alive and so we both only ever want to work part time.

We earn $35,000 a year. If we sell the property when we are 65 and downsize, would we have enough to retire on and live a simple life?

BAREFOOT REPLIES: A near-death experience will certainly cause you to rethink things. Here’s what I’d be thinking: “Why am I limiting myself to only one course of action, 25 years into the future?”

If you only ever work part time, you’re unlikely to accumulate enough in super to give you a decent standard of living in retirement.

And what happens if you and your missus get 20 years down the track and decide you don’t actually want to downsize?

It might happen. Most pre-retirees tell themselves they’ll downsize when they retire — but most don’t.

It might be because of their emotional attachment to their home, or their community, or the arrival of grandkids, but they tend to delay it for as long as possible.

What do you do then?

Look, I’m all for living a pared-back lifestyle and taking time to stop and smell the roses. But you’re young and you still need to work.

My advice is find a job that will give you meaning and purpose, and do that.

Scott Pape advises parents not to bail out their young-adult children if they are in debt, but to show them support.

OUT OF THE MIRE

JAN WRITES: Can you advise my 24-year-old daughter on how to face the financial mess she has created? She lost her job in May and has lived off credit cards since then; she now has debts of $27,000. After a period of estrangement from us (she simply would not talk to us — we think she was ashamed), she has finally told us about her problem.

We already knew, as we are being hassled by credit collectors looking for her. She needs our support to get on track, but where to start?

BAREFOOT REPLIES: Without a job, and with a shot credit file, the easiest short-term solution will be for her to go bankrupt.

But it won’t do anything for her self esteem. To reconcile both her self-worth and her net worth, she needs to take responsibility for her actions and dig her way out of this mess.

She needs to have a win — and you can help. So, sit down together and write out all her outstanding debts on a piece of paper so she can get the full picture.

Obviously, she needs to get a job (preferably two) and begin meeting the minimum repayments on all these debts.

Then she should “domino” her debts from smallest to largest, focusing all her efforts on knocking out the smallest debt. Celebrate with her each time she pays off even one debt. Give her all the love and support you can muster, but don’t bail her out — let her find her own way back.

IT’S ALL FOREIGN

ANNIE WRITES: We are two middle-aged partnered women — one retired, one about to go part time in a well-paid professional job.

We have very good superannuation balances and are living (comfortably) off my salary. We are debt free and pay off our one credit card each month.

We would like to explore investing in shares but know absolutely nothing about it. Dividends, blue chips, bonds — it is a foreign language to us. Where do we start?

BAREFOOT REPLIES: You’re already an investor. Congratulations!

And you’ve been smart enough to invest via the most tax-effective structure available: superannuation.

The fund that you’re with now probably invests on your behalf.

However, there are some low-cost super funds that now offer a “direct investment” option, which allows you to invest part of your super into buying individual shares that you select.

Of course, choosing which shares to buy is another matter. You could pay for a full-service stockbroker, you might wish to do a course through the ASX, or you might want to think about joining my investment newsletter, the Barefoot Blueprint.

Right now investing may seem like a foreign language, but it really does come down to common sense. Plus it’s a lot of fun!

The Barefoot Investor holds an Australian Financial Services Licence (302081).

This is general advice only. It should not replace individual, independent, personal financial advice.  

The Barefoot Investor: the only money guide you’ll ever need (Wiley $29.95) heraldsun.com.au/shop

Originally published as Make the most of a jackpot, and be smart with debt and retirement plans