Just when you thought it was safe to be a lottery winner comes the buzzkilling news that many winners, even those in the multimillion dollar range, manage to blow through their windfalls and are back to broke in under seven years. Heed this; if the money comes in fast - whether from the lottery, an inheritance or even a killing in the stock market - it has an uncanny tendency to run out fast too.
By David Rae, Certified Financial Planner, Accredited Investment Fiduciary
Photo: Artura Pardavilla/Flickr
Last week three people split the $1.6 billion Powerball kitty and each went to sleep a cool $533 million richer (which after taxes will end up a paltry sum around $260 million). Chances are though, none of them will see out this decade with anything near that, nor will the eight folks who won $2 million, nor the 73 who grossed a million.
I'll admit, until this week I'd never bought a Powerball ticket before. But after appearing on KTLA and CBS News here in Los Angeles and being interviewed about the ins and outs of a big win, I went out and bought a few tickets the following day. Over the years, my firm, Trilogy Financial, has handled a number of lottery winners so I know all about the pitfalls. But of course I couldn't resist the possibility of experiencing some of those pitfalls for myself.
You may be asking "I won the lottery; now what?"
For anyone who gets a lottery-level windfall - whether it be a tax refund, insurance settlement, big bonus, inheritance or pot of gold at the end of a rainbow - the lessons are the same. Be prepared to make smart financial decisions. Life can change on a dime and where mega millions are involved, it can easily be a nightmare-gets-real instead of a dream come true.
5 Financial Tips to Avoid the Lottery Curse, and maximize the potential of this great opportunity.
1)Keep the news a secret until you have a qualified financial planner, attorney and accountant with the necessary experience to guide you.
I know if I won a billion dollars I would want to climb on my roof and scream with joy. But I'm going to urge some discretion here. Posting on Facebook or Instagramming a selfie with your new jet may draw unwanted attention. Major money plus major exposure in the public eye can mean significant vulnerability for you and your loved ones (kidnapping for ransom, anyone?) or suddenly becoming the target of every con artist on the block (to say nothing of your loser cousin-in-law with his hand out for a handout.)
2)Don't rush out and overdo it on the spending.
Most often people get referred to me a few months after their windfall has become common knowledge for everyone they know (and quite a few who they don't). Unfortunately though by this time, much of the money has already been blown. Sad but true, your wish list will always cost more than you have, no matter how large or small the amount. So grow up and accept that the fantasy of fulfilling every single dream that you have is simply that... a fantasy.
With winning jackpots on the ginormous side, of course you can set aside some of your new cash stash (say up to 3%) to blow as you wish. But after that, it needs to be invested in a way that will help you meet your personal goals (as in setting up college trusts for your kids) or your altruistic ones (as in setting up college trusts for someone else's impoverished kids.)
3)Let your financial team act like the bad guys so you don't have to.
Winning big bucks will make all kinds of people come out of the woodwork begging for dough; scammers, charities, time shares in Dubai, family and friends, I've seen them all. Do not listen to their pleas, no matter how desperate! Let your financial professionals do the heavy lifting and keep your money going where you want it and nowhere else. If anyone comes asking, tell them you can't access the funds, are developing a plan with your financial team and cannot making any decisions at the moment without the good counsel of your advisors.
4)Don't quit your day job just yet.
If money was no object, many people would switch careers, work fewer hours, go back to school, become shopaholics, do nothing at all, or devote themselves to developing a drug habit. But even if these are roads you're going to take later, you don't have to do it this minute. In fact, you shouldn't. This is because going cold turkey and suddenly quitting work to take early retirement can be traumatic and cause psychological instability. Take some time to figure out what you want to do with your life. It'll be there waiting for you when you're ready.
5)Carefully weigh lump sum vs. annuity payout
Personally, I'd take the lump sum payment, a bird in the hand is worth two in the bush. But then again, I'm a careful guardian of my cash.
On the other hand, we know that a vast majority of lottery winners go broke or worse within a few years of hitting the jackpot. Annuity payment won't solve this problem completely, but may at least slow you down on your desperate quest to spend all your moolah as quickly as possible.
Bottom line, your financial planner can help you make the right choice for you specific situation, and financial goals.
Without a robust financial plan drafted and enforced by professionals, you will be amazed how little effort it takes to waste vast amounts of cash and ending up broke. With smart planning however, a pile of new money can be life changing for you and those you love as well for innumerable others should you decide to create endowments for the social good. Acting responsibly in the face of fortune will then bring home what real winning is all about.
Want even More Powerball Advice? Check these two videos from recent newscasts:
David Rae on the KTLA Morning News
David Rae on the CBS Evening News
DAVID RAE, CFP, AIF is a Los Angeles-based Certified Financial Planner with Trilogy Financial Services. He is a leading voice of financial planning for the LGBTQI community, and has been helping people reach their financial goals for over a decade. Follow him on Facebook at www.facebook.com/davidraecfp or via his website, www.DavidRaeFP.com.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA,SIPC, a Registered Investment Advisor. Trilogy and NPC are separate and unrelated entities.