- Personal Finance
What To Do After You Win The Lottery
Thanks for visiting my hub on what to do after you win the lottery. I will warn you in advance that some of what I advise may not be in line with conventional wisdom. However, I think that it is sound and I think you'll see the logic of my arguments. With that said, let's take at a look at how to preserve all that money you just won! (And if you're looking for tips on how to get to this point, please visit this hub on How To Win The Lottery.)
Congrats! You Just Won the Lottery!!!
We all dream about what it would be like to win the lottery - to suddenly have more money than we ever dreamed of. Of course, money doesn't necessarily make life any easier. In fact, in the case of lottery winnings, it can make it a lot more complicated. Moreover, there are many tales of woe amongst lottery winners who made terrible missteps and found themselves worse off financially than they were before.
With that in mind, I'm going to focus on the financial aspects of what you should do with your lottery winnings. Naturally, there are other things you should do - change your phone number, etc. - but I'm not going to go into ail regarding those activities. (The only thing I will say is that you don't have to claim the lottery winnings in your own name; you can establish a trust - or some other entity - for that purpose, and thereby try to keep your anonymity.)
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First Decision: The Lump Sum or The Annual Payout?
One of the very first decisions you'll have to make after winning the lottery is whether to take the lump sum or the annual payout. Many experts will say that you should take the annuitized payouts: you'll have a steady stream of income, you can better manage taxes, and the overall amount you'll receive is greater. If you win a $100 million lotto, your payments over whatever the payout period is will equal at least $100 million.
With the lump sum, you'll get everything you're entitled to up front, and there's some merit in that. But, you should be aware that you're not going to get what's advertised as the jackpot amount. First of all, that amount is an annuitized number, based on the multi-year payments you would receive if you chose the annual payment option. Taking the lump sum means that you get the present-day value of the pot - usually about half. So, winning a $100 million lotto and taking the lump sum means you'll probably end up with about $50 million.
In addition, other factors may also come into play besides just the overall amount you'll get. Your age, for instance, may play a role in which option you choose. If you're 60 years old, do you really want to bank on living another 30 years in order to collect that last check? Moreover, if you die, there's a chance that the annual payments will come to a halt. (This will depend on the rules of the lottery you win under, so it's worthwhile to consult with experts to figure this part put.)
Personally, I favor the lump sum option. Yes, you'll get the reduced, present-day value of your winnings and have a whopping tax bill, but if properly managed you can come out much further ahead with the lump sum than the annual payments.
By way of example, let's say that 30 years ago, you and a friend won $8M in a lottery and split it evenly. That's $4 million each. You decide to take the annual payout of $133,333.33 for the next thirty years. After taxes, let's say you're clearing $80K per year.
Your friend takes the lump sum payout. Present-day value makes it only worth about $2M, and after taxes he's got about $1.2M to do as he sees fit. He splurges a little, but is also astute enough to invest $100K in Johnson & Johnson stock.
Fast-forward to today. You've just received your last annuity check for $80K (after taxes). You've had a good life, not having to work for thirty years, but $80K per year isn't what it used to be. In the 1980s it was a lot of money, but as time went by that buying power slowly got whittled down. While that check gave you an upper-class lifestyle in the 1980s, it really just makes you middle class these days - and now the well has run dry. Moreover, while you never went completely overboard with your spending - you kept to an annual budget of $80K or less - you never really put anything aside for investing because there was always "next year". By the time you finally thought to do it in earnest a few years ago, there was a global financial crisis, and well, the rest is history...
Your friend, on the other hand blew through about half his winnings within the first two years. He then knuckled down and spent the next two decades experiencing various successes and failures in business as he tried to parlay his winnings into something more. He never really hit it big, but he had modest successes that kept him from having to work a traditional 9-to-5. Moreover, he never touched the J&J investment, calling it his "nest egg." Now, 30 years later, his J&J investment is worth nearly $4 million. Moreover, it's throwing off $138K every year in dividends alone. In short, your friend has roughly 40 times his original investment - now equal to roughly the same amount that he originally won - plus he's getting a sweet dividend income that he can live off of every year. And that's just from investing $100K of the his initial winnings. (You can check my numbers using Johnson&Johnson's Investment Calculator.) Where might he be had he invested more?
Long story short, I think you can give yourself a better deal if you take the lump sum, but you have to be smart about what you do with it. (And FYI: If you're curious as to how beneficial smart investing can be - even if you don't win the lottery - please visit my hubs on Getting Rich with Dividends and How Ordinary People Got Rich.)
Don't Quit Your Job Just Yet!
One of the first impulses people have after a lottery win is to "call in rich." In other words, quit their jobs. Don't! At least not right away.
First of all, let's ponder a question: the richest people in the world - Bill Gates, Warren Buffett, Carlos Slim - what's one thing they all have in common (aside from billions of dollars)? They're all still working! Not a single one of them made a billion dollars and then retired to the beach to sip mai tais! They're all still active and engaged businessmen. Why? Because they're doing something they love. But I suspect they also know something that most working-class people don't: doing nothing is boring!
You can quit your job, but in no time at all you will be bored out of your skull. I actually know someone who won a substantial amount of money in a lottery. Afterwards, they ended up taking a job at a fast food restaurant - just to have some human interaction and to have something to do every day. Without that, it's very easy to see the money as a way to entertain yourself, and before long you're spending it on things you don't need and never even wanted, just to have something to do.
In addition, even though you're now rich, you should still remain professional. That means that if even if you do decide to quit, you should render the traditional two weeks' notice. (It would be a shame if sudden wealth transformed you into an inconsiderate, uncouth jerk.) And who knows? With no more financial pressure, you might even find work enjoyable - if not the job you're doing, then something else. (I'm sure you had a dream when you were small about what you wanted to be or do when you grew up. Now's your chance to pursue that.) The real point is that you shouldn't suddenly become idle or slothful. If you really hate your job but don't know what to do with yourself, take some classes and try to figure out what you like. But simply deciding to do nothing at all for the rest of your life is a bad idea.
Poll On Working After a Lottery Win
If you won the lottery - $10 million or more - would you continue working?
Two Certainties in Life: Debt and Taxes
Now we get to the meat and potatoes of this hub: what to do with the money. First of all, take care of your debts. Almost all of us owe money: car notes, student loans, mortgages, etc. Get those out of the way asap so that you can become debt-free.
Next, be aware that you have to pay taxes on your winnnings. It never ceases to amaze me when someone gets a windfall, and then the next year (or a few years down the road) they're declaring bankruptcy because they never paid any taxes and Uncle Sam swooped in and took the last of their winnings. Go ahead and set aside about 40% of your winings for tax purposes.
In short, your debts and taxes (not exactly what Ben Franklin said, but close enough) should be the first two things you take care of before you spend one red cent of your winnings on yourself. To help with this, one of the first things you should do is consult with three types of professionals: a lawyer, an accountant and a financial planner.
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Avoid any Spending Sprees
From the moment you first discover you've won, that money is going to be burning a hole in your pocket. You're going to have the urge to splurge and lavish gifts on yourself. Don't! Not immediately, anyway.
The money is going to feel like a drug, and you're initially going to be completely stoned: giddy, over-the-top emotions, etc. Moreover, you're going to have the munchies - except you'll be hankering for consumer goods. Just like with a real drug, this is not the time to be making important decisions. Let the high wear off a little first, then look at the situation rationally in terms of what you want to buy.
Maybe you do need a new house; maybe you do need to trade in your old jalopy. But be smart about it. If you win $2M, think about whether it makes sense to go buy 4 cars and a million-dollar mansion. (By the way, at 3% the taxes on a million-dollar home will run you $30K per year.)
In short, no one is saying that you should never spend this money or treat yourself a little. You just need to be smart about it and think it through. ("Impulse buying" is one of the things people tend to pick up with a lottery win, but they don't put that anywhere on the giant check they give you.) Simply put, you should put off purchases until you've started putting the money to work for you, whether through stocks, bonds or other kinds of investments.
Investing for the Long Term
Okay, assuming all of the advice above is adhered to, you've gotten your money, you've paid off your debts, you've set money aside for taxes and you've avoided any excessive purchases or spending sprees. Now let's put this money to work:
Replace Your Salary: First, you're going to need money to live off of each year. It's best if you establish a budget (yes, a budget, Daddy Warbucks!), so you need to figure out how much you'd like to have as income each year. The experts all seem to say that - if properly invested - you should be able to withdraw 5% of the money each year without running out. Focusing on that, you'll need to invest about 20 times whatever amount you'd like to get annually. (This is because 20 x 5% = 100%.) So, if you want income of $50K per year, you need to invest $1M. (20 x $50K = $1M.) If you want $100K per year, you need to invest $2M dollars. (FYI: 5% is more than achievable, and is below the amount that stocks have historically returned. A good financial planner can steer you towards investments that can achieve the kind of returns you're looking for.)
Invest For the Long Term: In addition, like the Johnson & Johnson example mentioned above, you need to make some quality investments in financial instruments (stocks, bonds, etc.) that you never plan to touch. It should be money that's simply invested and allowed to grow. There are many stocks, mutual funds and so on that can help you achieve dynamic growth in an investment portfolio without taking on an undue amount of risk. (Again, a good financial planner can help you make great investment selections.)
Establish Trust Funds for Your Children (and Grandchildren): One of the terribly sad things about many lottery winners who end up losing it all is the fact that they really had a chance to set their entire family up for life - kids, grandkids, the whole shebang - but they never did. (Some never even thought that far ahead.) How great would it be to establish a trust that pays for everyone to go to college? Or that holds some investments for your kids so that when they become adults (or some time thereafter) they have a tidy little nest egg that will keep them from ever having to struggle the way you did? That way, even if you blow every other penny, you've still given your kids a great head start in life. (In addition to establishing trust funds, you can further flesh out your estate planning by visiting these hubs on Drafting a Will and Power of Attorney and Other Documents You need.)
Avoid Trying to Prove You've Got a Head for Business: For whatever reason, people who come into large sums of money - whether via the lottery, professional sports, legal settlements, what have you - always feel the need to prove themselves as astute businessmen. They'll invest in car dealerships, fancy restaurants, hotels... Just about everything under the sun (and often lose their shirts in the process). That is completely unnecessary. Again, as the Johnson & Johnson example above showed, there are already tons of great companies out there that you can invest in - companies that have been around for ages, with proven track records and proven results. You don't have to reinvent the wheel here by trying to invest in some new start-up or hair-brained scheme. Unless it's always been a dream of yours to have your own restaurant, music studio, hotel, etc., I'd avoid all of those and find some solid dividend-paying stocks/mutual funds to invest in and call it a day.
In brief, the money - no matter how large a sum it is - won't last forever unless you're smart with it. You're going to have to invest it shrewdly and make it work for you.
Generosity to Family and Friends
It's no surprise that - despite your best efforts at remaining anonymous - people will start coming to you for handouts if they find out about your good fortune (even complete strangers). With this in mind, all of the experts say that you have to learn to start saying "no" to everyone. I tend to disagree.
If, in accordance with the advice noted above, you've taken care of debts and taxes, and have enough set aside for the long run (not to mention trust funds for your kids), then it's probably time to be generous. For most of us, no matter where you are in life, someone at some time helped you get there. Maybe they wrote you a letter of recommendation. Maybe they gave you a loan when you were desperate. Maybe they helped you take advantage of an opportunity. Basically, all of us have people in our lives that have helped us at some point or another. Now that your ship has come in, you shouldn't make everyone come to you and kiss your ring like you're Don Corleone passing out favors.
Personally, I tend to think that your generosity should start with parents and siblings. How much? Well, I would say that depends on how much you won. But let's say you won big,and after taking all of the advice noted above, you have $20M left. If you have a brother and sister, I'd advocate giving them $1M each, and $1M to your parents. (You've already got more than enough for a couple of lifetimes. Don't be stingy. Besides, what would you want them to do if your positions were reversed?) Also, just in case your siblings are bad with money, a trust fund for your nieces and nephews to go to college would be a nice gesture.
After family, you can decide who's been a good enough friend to you to merit something, although you shouldn't feel obligated to hand out cash to every single acquaintance. You know the ones that have been like a brother or sister to you, and those are the ones your largesse should extend to. (And it doesn't have to be - and probably shouldn't be - at the same level as your siblings, but that's your call).
Enjoy Your Wealth!
Last but not least, enjoy your winnings! If you've done everything right, the future of you and your entire family is completely secure. Congratulations! (Now you can head to the beach and get that mai tai...)
And just in case you need some kicks and grins while counting your millions, you can check in and see what the poor people like myself are doing this season by visiting the Passive Pursuit of Income Blog, where I chronicle my attempts to build up passive income online, as well as list my Resources for Generating Passive Income.
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