"Need - Want - Need"
Settlement Fund Allocation Using the
Seasoned claims professionals, mediators and attorneys can handle hundreds or even thousands of personal, physical injury claims over the course of a career.
Most individual plaintiffs, on the other hand, endure the often grueling settlement process only once.
It's little wonder those on the receiving end of a settlement can feel overwhelmed by the financial decisions they need to make as their ordeal is drawing to a close.
Talk about a daunting task!
Particularly when settlement funds need to last years, decades or as long as a lifetime, clients understandably want to make sure they do what's right for themselves and their families.
Why then, with so much hinging on the need for their settlement dollars to provide future security, when presented with the opportunity to enter into one of the safest and most time-tested future security settlement solutions available - a structured settlement - do many people balk?
People make decisions based on experience, knowledge and for a variety of personal reasons we may never fully understand. But when structuring is an appropriate option, is there a way to help someone facing such a weighty decision how to choose wisely?
We believe there is.
How Much to Structure?
While not completely foolproof and based solely on a technique we've used that seems to resonate with clients, our firm will frequently use a simple exercise to help a person get to the bottom of making a smart decision that's right for them.
We call it the Need - Want - Need method.
Beginning with their anticipated net recovery figure (after deductions for attorney fees, liens, costs, etc.), I ask clients to imagine dividing their settlement proceeds into these following three distinct special purpose categories, or buckets:
Money for Things You Need Now
Money for Things You May Want but Can Afford to Lose
Money for Things You Will Need in the Future
The first two categories are combined as one's "Up Front Cash" amount.
And just as no two people are alike, the size of each bucket will vary from case to case and person to person.
This first bucket of money is reserved for needs that absolutely MUST be met soon after the settlement draws to a close. These can include the obvious and the not-so-obvious including:
Seed Money for a Special Needs, Spendthrift or Other Type of Trust
Making Home Modifications to Accommodate a Disability
Anticipated Near Term Surgery - Paying Off Credit Card Debt
Repaying High Interest and/or Family Loans
Replacing a Car that's Past its Prime
We actually broaden the definition of "NOW" to include money that will most certainly be needed (emphasis on NEED versus Might Want) in the next 3-5 years. This reassures clients their shorter term needs will be taken care of.
It's this second bucket that helps clients focus on the importance of the decision they face and helps them differentiate between what's really a "need" and what's just a "would like to have."
KEY CONCEPT: This bucket is reserved for money that a client could absorb if it all disappeared the next day.
This is their "Monopoly" money, if you will. In a perfect world, it will last a long time. But if it doesn't, the client needs to be able to accept any diminution in value or loss of principal.
Ask anyone who's ever had easy access to money, how long it usually lasts. There's no shortage of ways any amount of money can disappear faster than anyone believes possible.
Most people have good hearts and want to help others when they can. Those receiving large sums of money are easy targets for the conscienceless masses intent on separating them from their new found wealth. Sometimes, sadly, this includes family members who may not even realize they're doing anything wrong.
There's a reason so many lottery winners, young pro athletes signing lucrative contracts and personal injury plaintiffs end up with little money left after a short period of time. It. Just. Goes. Fast!
This bucket should also include funds people want to invest with which can be a very good thing. Those with experience investing, who understand the different categories of risks and/or have a history of working with an advisor who understands their goals will potentially do just fine if they put a fair amount of money into this bucket.
But if someone's idea of "investing" is opening a restaurant or following a friend's tip to buy shares of "Can't Miss" stock, this bucket could end up empty very quickly. Ask anyone who once owned Enron stock how that worked out for them.
This money might be spent wisely or frivolously. Either way, the client needs to be willing to accept the possibility that it could be one just as easily as the other.
III. The Safety Net Money
This is the Safety Net Bucket. The Guaranteed Future Bucket. The No-Matter-What-Else-Happens-This-Money-Will-Be-Here Bucket.
This is the Settlement Preservation Bucket and a structured settlement fills this bucket quite nicely. In fact, for a variety of reasons, it's usually the best option for this bucket which should be considered as sacred as a Social Security retirement check.
The ability of structured settlements to help meet long term financial needs is well established. Encouraged by federal legislation and offering preferential tax treatment on guaranteed cash flows that can be customized to meet one's future anticipated needs, nothing can compare to a structured settlement.
These future payments can be arranged to meet a variety of anticipated future needs such as:
Replacing Lost Income and/or Pension Cash FlowsBecause these funds often substitute for a lost paycheck when one's ability to earn a living has been compromised, securing this portion with a structured settlement annuity is as vital to this bucket as cash is to Bucket Number One.
Future Surgeries and Monthly Medical Costs
Cash Flows into Special Needs, Spendthrift or Other Trusts
Rent or Mortgage Payments - College Tuition Payments
Property Taxes - Household Services - Planned Vehicle Replacement
Dividing up one's settlement into "Need-Want-Need" buckets helps clients focus on what's most important and helps them visualize life long after the dust settles on a claim settlement.
From a hierarchy of needs point of view, the first and third buckets should be solidly addressed before even thinking about the second bucket.
When dollars and futures are as inextricably linked as they are in so many injury settlements, needs should always trump wants. At least until the needs are met.
This Need-Want-Need prioritization technique will set the stage for important dialog on the post-settlement planning process and can help clients turn an intimidating task into something they can more easily deal with resulting in greater confidence in their decision.
Thank you for the continued opportunity to be of service and best wishes for continued success in your personal and professional lives.
Dan Finn, CPCU, CSSC, RICP�
Certified Structured Settlement Consultant
Retirement Income Certified Professional�
NOTE: This newsletter is presented for educational purposes only and should not be construed as tax or legal advice. All rights reserved.
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