Winning the lottery is usually one of the best things to ever happen to an individual, but without mental and financial preparation for what is to come next, winning can turn into a complete nightmare. At some point in our lives, we all fantasize about being multimillionaires, and unfortunately, only a fraction of us ever enjoy this kind of wealth, whether it is earned or through luck.
Although the odds of winning the lottery are 1 in 175,223,510, which is essentially zero percent, unless you get technical and think any number above zero still gives you a chance (we can already tell you’re the gambling type), this doesn’t stop people from shelling out a few dollars each week on lotto tickets. If you do happen to win the Mega Millions or Powerball, it’s not as simple as collecting your winnings, paying some taxes, and buying whatever you want with the leftover money.
Despite the potential to enjoy the lifestyle of the rich and famous, there are both light and dark sides to winning the lottery. Here’s a list of the most important things to do if you win the lottery as well as financial considerations to keep in mind when determining how to manage your newfound wealth.
Within The First Two Weeks
First things first, place your ticket under maximum security. Make multiple copies, store it digitally on your hard drive as well as an external backup, and secure the original in a place only you and your spouse have access to. If you have a safe in your home, either leave the original ticket in there for the time being or take it to the bank and place it in a safety deposit box.
Wait It Out
Rushing to tell the world you just won the lottery could lead to quite a few complications. Instead, keep a low profile for a few days. If you have the patience, you can even wait a week or two. Continue your daily work routine, stay mum about your big win on social media like Facebook and Twitter, and quietly begin planning for your new life. You’ll get the money eventually since most lotteries allow winners to come forward 180 or 365 days later to claim their prize. In the meantime, you want the hype to settle down and allow yourself time to prepare for the windfall coming your way. Jumping in to claim your prize immediately, with all the media frenzy, hype and excitement, can result in poor personal and financial decisions from the get-go.
Bring In The Experts
Before you quit your job, assuming you want to, and collect your winnings, you’ll need to hire some professionals to help advise you. This includes an attorney, a financial advisor or planner, a wealth management firm (fee-based, rather than commission based), and a certified public accountant (CPA). These individuals will help you decide how to best allocate and manage your wealth, as well as prevent you from falling into common traps that the suddenly wealthy find themselves in, such as overly-aggressive or high risk investments.
Fly Under the Radar
If your home address and phone numbers are publicly listed, change them. Countless people are going to show up in your life when they find out you won the lottery: estranged parents, long-lost relatives, friends, charities, investment advisors, strangers that swear they’re your best friends, work colleagues in need of some financial support, and everyone in between.
Avoid the mad dash for your cash and fly under the radar for a while. It’s generally advisable that you get a post office box for your mail and change your phone number to an unlisted one. The easiest way to say “no” to people with their hands out is to make it difficult to find and approach you.
When Claiming Your Prize
Once you’re settled and ready to claim your winnings, you will have to decide between a long-term payout that spreads out your winnings over 20 to 30 years, or a lump sum payment in which you receive the entire amount upfront, not accounting for taxes.
Long-Term Payout Option
If you go with the long-term payout option, the overall jackpot will be divided up into annual payments, spread out over 20 to 30 years. This provides a stable income or cash flow for decades. You’ll also be in a lower tax bracket than the lump sum option, so ultimately you may wind up paying fewer taxes overall.
Finally, one major reason lottery winners choose the long-term payout option is to exercise restraint because it is easier to maintain a regular annual budget with a future focus when you can learn from mistakes of past years. With steady, yearly payments, families are less likely to blow all their money at once on mansions, fancy cars, luxury vacations, clothes, parties, etc. and focus more on enjoying a quality standard of living.
Disadvantages To The Long-Term Payout Option
Unfortunately, there is no cost of living adjustment for your annual payments. You’ll continue to be paid in 20XX dollars (the year you won the lottery), which means that the forces of inflation will lessen the real value of your incoming funds each year. Similarly, you will miss out on investment opportunities in which you could earn compound interest or a higher rate of return than the one used to calculate payouts in your annuity.
And what about your beneficiaries or heirs? Depending on the state you live in, you may or may not be able to pass on your remaining lottery payments to them. Another problematic aspect of the long-term payout option is the limited access you have to these funds. Although they are allocated to you, you cannot receive more than the predetermined annual payments. If an expensive medical problem or other emergency arises, how will you pay for it?
Finally, if the lottery is bankrupted or disbanded, your payments might stop altogether.
Lump Sum Option
There is much debate over whether the lump sum payment option is worth it. We’ve all heard of lottery tragedies, usually where the winner took the lump sum and blew all the money in a short period of time, and psychological studies have even found that winning the lottery does not improve happiness over the course of time. With that being said, there are still many advantages to taking the lump sum payout.
Benefits of the Lump Sum Option
Although taking a lump sum amount places you in a higher tax bracket, you could end up paying less taxes than the winner who went with the annual payouts, assuming personal income taxes increase over the next 20 to 30 years. You could also take advantage of compound interest or investment returns by putting a majority of the money into investments with average returns. For instance, over the last 100 years, the stock market as a whole has statistically averaged returns of close to 9%. Putting your lottery winnings in an index fund at Vanguard or Fidelity can earn you a healthy return on your investment. Other options include diversifying your wealth into bonds, real estate, hedge funds, private equity, and other special investment vehicles.
The lump sum is preferable for older individuals who don’t want to risk their annual payouts not being passed down to their heirs, allowing winners to place the money in a family trust and start the financial planning process.
Lastly, a lump sum payout simply avoids future risks of not receiving your winnings at all. Receiving your money now guarantees it is in your possession – what happens to it in the future is solely your responsibility from that point on.
Disadvantages of the Lump Sum Payment
Lottery jackpots are advertised as huge amounts, but if you actually win, you are paid the current cash value of the jackpot. The advertised jackpot is based on the Lottery Commission paying you through a 20 or 30 year annuity, not all at once. This is substantially less than what you’d receive if you’d gone with the long-term payout option instead. The final lump sum figure usually equals about half of the winning jackpot, and after taxes, you are probably looking at only 30% of the advertised number in your bank account.
Furthermore, the sudden influx of money could create reckless spending habits and encourage poor investment strategies. When you have so much, you don’t realize how quickly it can disappear if you start to lose money left and right, until one day, you wonder where it all went.
Managing The Money
After you determine which payout option is best for you, it’s time to manage the money you’ve received. When you win the lottery, dozens of “friends” or individuals with the “next revolutionary business idea” will appear out of nowhere. You’ve never met them in your life, but they’re convinced you guys are best friends and have known each other all your lives. Although these strangers may have good intentions – supporting a charitable cause or starting a new mission in Africa – your number one priority after claiming your winnings is to determine how to best manage your newfound fortune and wealth.
There is a reason studies have shown that, by the end of the third generation, 90% of families have none of the wealth left behind by their grandparents, and 95% of all inheritance plans fail completely. It all comes down to poor financial management and planning.
Emergency Fund – Set Aside Savings
First and foremost, you’ll want to divert a portion of the jackpot into an emergency savings fund. Although you’re now much wealthier than you were previously, this doesn’t guarantee you a lifetime of luxury and riches. Having an emergency fund will ensure financial stability for your family, even if your investments generate poor returns or go bankrupt. Many personal finance experts say that you should set aside enough money to cover 6 to 12 months’ worth of expenses, so although it’s tempting to go out and buy a new Corvette or Mercedes, be sure to build up an ample safety net first. We recommend you start by placing 10% to 20% of your lottery winnings in safe investment options.
Pay Off Debts
After you’ve created a sizeable nest egg for financial emergencies, a lottery winner’s next step would be to pay off any existing debt. Whether your debts are student loans, car loans, credit cards, mortgages, outstanding personal or business loans, paying these off will start you off with a clean slate. As for your primary mortgage, consult your financial advisor to determine whether the tax benefits of continuing payments on the loan outweigh any benefits you might gain from paying off the mortgage early.
Invest, Invest, Invest
After you’ve built up a savings account and retired most of your debt, the next sensible step would be to invest a significant portion of your lottery winnings. This is where your financial advisor helps you determine the best way to make your money work for you through various investment outlets, such as rental real estate properties, mutual funds, stocks, bonds, private equity, commodities, etc. It’s up to you to decide how aggressively you want to invest, but for optimal results, a portfolio mix that balances capital preservation and growth while diversifying your exposure is best. It may be wise to start off with a conservative approach, develop an understanding of the financial instruments you may be investing in, and then fully fund the projects you feel most comfortable with.
Donate To Causes You Support
Everyone has a sob story and when people learn of your fortune, many of them will plead for you to support their causes. Some people are really good at upping the heart-wrenching factor to gain your sympathy and eventually money, but it’s important that you quickly learn how to decline their requests for funds. This isn’t to say that you should be selfish or ungrateful and hoard all the lottery winnings for yourself, of course. Quite the contrary – donating funds to charitable causes not only makes the world a better place, but you also get tax deductions and a chance to network with other high net-worth individuals. Rather than thinly spread your donations across multiple organizations, pick a few of your favorite charities or causes you genuinely want to support and send substantial donations their way.
What To Do If You Win
Winning the lottery can, in fact, change your life. “For the better” isn’t guaranteed, but with proper financial management, a plan for the future, and sound investment strategies, winning the lottery can bring peace of mind and a higher standard of living for you and your family for generations to come. Until then, work hard to grow your income, save more and spend less, and you may eventually become a millionaire without the lottery.