How to Handle Retiring After Receiving a Large Sum

Even a small settlement can accelerate your retirement path or make your retirement more comfortable. Prostock-studio/Shutterstock

If you receive enough money from a lawsuit or other source, you might be able to retire earlier than the typical retirement age. However, to make this work, you must utilize the right financial strategies, plan appropriately, and build a system that can last you the rest of your life.

How Settlements Are Taxed

Once you finalize settlement negotiations, you’ll need to understand the tax liability on your settlement. Depending on where you live and the nature of your claim, you may or may not have significant taxes to account for.

Several things are tax-exempt in your settlement, including:

• Any forms of compensation intended to compensate you for medical expenses related to injuries or illnesses in personal injury incidents.
• Any forms of compensation for pain and suffering related to these incidents.
• Any forms of compensation related to mental and emotional trauma stemming from these incidents.
• Any forms of compensation related to loss of quality of life, such as loss of consortium.

However, some things are subject to tax, including:

• Any forms of compensation designed to replace lost wages or benefits, as your wages or benefits would have been taxed anyway.
• Specific forms of compensation for property damage, like repairing or replacing your car or other personal items damaged in an incident.
• Rare punitive damages are typically imposed on businesses to discourage them from particularly egregious activities.

As you might expect, managing taxes associated with both lump sum and structured settlements can be challenging, so consider working directly with a tax professional to determine your responsibilities.

Your High-Level Financial Management Strategy

As you approach retirement, you’ll need to adopt a high-level financial management strategy. At this point, you don’t need to figure out exactly how many dollars and cents you’re going to invest or where you’re going to invest it, but you should have a big-picture idea of what your retirement will look like.