5 Ways Michael Phelps (and You) Can Manage a Windfall

What's the first thing you should do? Absolutely nothing, experts say.

Michael Phelps smiles on the podium for the men's 200m individual medley final during the medal ceremony at the National Aquatics Center during the 2008 Beijing Olympic Games in Beijing on August 15, 2008.

Michael Phelps is expected to earn $40 million to $100 million over his lifetime.

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Olympic superstar Michael Phelps is about to cash in—big time. Thanks to his record-breaking eight gold medal wins in Beijing last week, Phelps automatically earned $1 million through his contract with Speedo (before the Olympics, he was reportedly earning $3 million to $5 million a year from corporate endorsements). But that's minor league compared with the estimated $40 million to $100 million he's expected to earn over his lifetime.

Regular people know better than to hold their breath for such a king-size windfall; it's more likely they'll come into a large chunk of money via an inheritance (although other possibilities include a business sale, an insurance settlement, or a lotto jackpot). According to Boston College's Center for Wealth and Philanthropy, an estimated $41 trillion is expected to transfer among generations by 2052. The bulk of that money will be passed to the children and grandchildren of the baby boomers.

So what should you do if you suddenly luck into or inherit a large chunk of money? We asked three wealth managers for their best advice:

Sit on it. "I give this advice to everyone, including people who are recently widowed. Don't do anything for 18 months," says Mickey Cargile, managing partner of WNB Private Client Services in Midland, Tex. "Let the impact of the windfall soak in and take some time to decide what you want to do with this money and what role it will play in your life." He suggests stashing the money in a safe, interest-bearing investment, such as a treasury bond or a tax-free municipal bond (particularly if you're in a high tax bracket).

Unfortunately, not every windfall is big enough to last a lifetime. Determine if your cash influx is a potential life changer or a life enhancer. If you're earning $50,000 a year, for example, $100,000 could provide a nice financial cushion if you use it to pay down debt, buy a home, or invest.

Determine your tax situation. Technically, this should be something you do in conjunction with committing to park your cash for a reasonable amount of time. Neglect the tax man, and you could wind up with a surprise bill from the IRS, says Lew Altfest, president of L. J. Altfest & Co., a New York investment advisory firm. If you're dealing with a large sum, it's probably a good idea to consult a professional, be it a financial planner, estate-planning attorney, or a CPA. Keep in mind that a variety of factors can influence your taxes: An inheritance might not change your tax situation, but if you sell a business or win a game show, your taxes may be significantly higher than what you usually pay.

Formulate a plan. After 18 months, Cargile says, decide if you want to spend the money right away (not recommended) or make the windfall work for you, either by supplementing your income or providing your income. "The deciding factor is the size of the windfall," he says. "If it's large enough, you may not have to take any risk. Instead, you can live off the interest or some component of it." When it comes to living off interest, Cargile says a good rule of thumb is to not spend more than 4 percent of the principal per year: "So if you have $100,000, you really shouldn't spend more than $4,000 a year. By doing so, you have a high probability of making your money last a lifetime and potentially leaving a legacy for your heirs."

It's also a good idea to consider your next move. "This is true for M.B.A. and Olympic stars, but it also applies to anyone with a defined limitation," says Altfest, who managed funds for a 23-year-old model who didn't plan to stay in the business but a few years. "Prepare for your next life—your second career." Now in her 30s, the former model used some of her earnings to go back to college and buy a house, he says.

Take action. It's important to define some goals, whether it's investing the money, making a large purchase, or giving to charity, says Ronald Rogé, CEO of R.W. Rogé & Co., a Bohemia, N.Y., wealth management firm. "The money has to have a purpose, so you can determine a specific time horizon and tolerance for risk," he says. When it comes to investing, Altfest recommends playing it safe with "plain vanilla" stock and bond mutual funds. Cargile suggests stashing one-third of the money in interest-bearing investments, such as a laddered bond portfolio, putting another third in intermediate-term, interest-bearing investments, such as tax-free bonds, and the final third in a diversified portfolio of stock funds.