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Nov 24

How To Make Your Compensation Payout Last

Reading Time: 4 mins

Personal injury compensation payouts are meant to accurately compensate a person and ensure that they have enough money to handle any medical expenses and any expenses that the person may incur and not be able to meet as a result of the personal injury. It’s important then that you make that money last. In trading, they like to say that the first rule of investing is to not lose money, and that the second is like it: don’t forget the first rule. Preservation of capital is the primary goal when you have received a compensation payout. Here’s how to achieve just that.


Preservation of Capital is the Most Important Rule

Preservation of capital requires a very sure sense of risk. You want to be conservative in your money management. Prudential money management implies that the focus is not on getting risk, but on keeping what you have. You can’t afford to take risks, lose money and find yourself short of cash to pay a medical bill, for example. At the same time, you do want that money to grow and perhaps become a sustainable source of income.

For many personal injury victims, their compensation payout will be completely exhausted by the end of their lives, eaten away by healthcare costs so that the individual has the care and support that they need. This makes decision making very different from that of people who are thinking about passing on sums of money.


How Your Wealth Manager Can Help

A wealth manager will be able to help you in two ways.

Firstly, a financial planner will be able to help you in the pre-settlement phase, to determine what kind of number you need to go for in order to meet your needs. As much as you don’t want to take risks that will leave you short of money to pay your medical bills, you also don’t want to ask for a compensation payout that is less than what you actually need. It helps to understand what the average payout is for personal injury cases similar to yours. This will give you a base rate that you can work with, going higher or lower depending on the peculiarities of your case. Your financial planner will also help you decide whether you should ask for a lump sum of money, or ask for it in installments, as streams of income.

Financial planners are more comfortable with the second stage of the settlement process: post-settlement. They will help you decide on what your investment options are, the costs involved, the prospective returns, and other decisions you can take so that your life can return to normal.


Work with Your Family

It’s really important to understand what the healthcare costs that you will have to deal with, will be, alongside your general cost of living. Costs are the driver to what you need to get in terms of compensation payouts, and in terms of what your financial planning needs will be.

You should involve your family in this process so that they understand that no matter how big the money seems to be, payouts are seldom so big that a person gets rich off of them. Usually, the size of the payout really reflects the extent of future healthcare costs that a person needs, for instance, so that the payout must be treated with a great deal of conservatism.

Many families fall for a lottery win mentality and go on a spending spree, after which they realise that they have very little money left and are back to square one, and often with significant medical expenses to pay. You have to keep an eye on your costs, constrain spending and stick to a very conservative process. Preservation of capital is the most important and the second most important rule that you should live by.


Be Cautious in Your Investment Strategy

Protection courts and personal injury clients often understand these issues and are cautious about how they manage their money. They know that they cannot tolerate any loss of capital.

You will have to develop an investment strategy geared around very specific goals. Speak to your wealth manager about a strategy that gets you a required rate of return or stream of income, over your expected life span. This strategy should be flexible enough for you to adjust to changing conditions.

Understand that there is a level of risk that should be deemed unacceptable, regardless of the potential returns. For instance, say you have the opportunity to make $1 million with a $10,000 bet, but the downside is that if you lose that $10,000, you will not have money for your health care needs. Greed tells us to chase that $1 million and it is a natural impulse to do so. But the devastating consequences of losing this bet are so high that the potential rewards are just not worth it. Where your capital is threatened, where you face the possibility of being unable to take care of your needs, you should walk away. This is a classic financial problem known as “ergodicity”, which reminds us that potential rewards can be undermined by the possibility of catastrophic loss. Getting rich is not your goal, your goal is to be able to meet your healthcare needs and other needs. You don’t pay your personal injury lawyer a success fee just so you could lose everything.


Disclaimer: MoneyMagpie is not a licensed financial or legal advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial or legal advice. Anyone thinking of investing should conduct their own due diligence.


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