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How to make a personal injury settlement last

Published On: Oct 25 2013 10:06:38 AM CDT
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By Joe Lee, Special to THELAW.TV

Perhaps you've heard about the University of Pittsburgh study that found winning the lottery makes it more likely you'll go broke, or you've read the theories about why professional athletes go bankrupt a few years after retirement. Managing large sums of money sounds like a wonderful problem to have, but people who receive big money often lose it if they lack discipline. Seven- and eight-digit numbers can blind a person to the cold fact that even big paychecks vanish if not properly managed. If you've received a personal injury settlement, it's crucial you maximize its potential and manage it well, especially when it needs to last a long time.

Taxes

Depending on the nature of the suit and the settlement, you may have to pay Uncle Sam a larger percentage of the money than you would prefer. In general, a lump sum hits harder than steady payments. A settlement for $1 million, for instance, can be taxed at up to 35 percent, meaning that you leave a full third of your money behind. Receiving the money owed to you in monthly payments under an annuity settlement drops the tax rate significantly, since the taxation rate rises at each income bracket. Structured payments, furthermore, encourage fiscal discipline, since they determine how much money you can spend, invest or save, whereas a lump sum removes all such boundaries.

Get professional help

Whenever you have enough money on hand to provide for several years' worth of work, you would be wise to invest some of it in accountants and financial planners. Build a financial "dream team" that will look out for your financial health based on an individual's expertise and background and remember that some professions, like stockbrokers, need only a minimum of both to give advice. Unless they have very specific experience working in investing, money management or legal fields, relying on family members for financial advice rarely works out.

If possible, keep working

The nature of a personal injury settlement usually prevents people from returning to their day job. Whether you have lost an arm or just needed a doctor's attention, however, a regular paycheck goes a long way toward financial security. A person who earns $50,000 dollars per year will need at least one million dollars in investments to make up for a job they left behind. What's more, anyone who stops working will lose the contribution for Social Security benefits, which may be crucial if investments go south.

Know when to spend

If you have a solid financial base, there is no reason you can't spend a small bit of your settlement on personal or luxury desires. Determine a small percentage of your settlement (no more than 5 percent is recommended) that can be spent on anything from a vacation to a new car, and you will be less likely to be tempted by a larger purchase. This helps you feel both in command of your finances and able to spend money on the better things in life.

The author, Joe Lee, is an insurance agent with a writing background in finance and accounting.

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