If you ever win the lottery, it makes sense to be curious about the payouts. Do you choose the annuity or the lump sum? It can seem like a big decision but in fact, it’s pretty straightforward. The best option when you have to choose between getting a lot of money up front or a little over time is the lump sum payment. Annuities are a form of investment but it’s controlled by the government instead of you. Yes, if you pick the annuity over 20-30 years you technically get more money from the lottery, but if you pick the lump sum and invest wisely, you can end up with more money overall. Investment-wise, it’s a whole lot easier to turn $100 million into $200 million than it is to take $10 million and make it $200 million. If you want an annuity to live on and payout to your family, invest in some high-yield money market funds or something like that. A professional investment advisor would be able to give you better advice of course. But if you think that you are going to need $100k a year, you only need to invest $10 million at 1% a year to get that and never touch the principle amount. That’s the kind of thing professionals will go over with you. Also, the annuities that they try to push on you are often not transferable to your family, so if something should happen to you, then they don’t get the rest, the state keeps that money.
It’s important to think about taxes in all this too. Often people see the big amounts and don’t take into consideration that the state will take its share of the proceeds as well. If that doesn’t seem all that fair, take it up with the man. Taxes are usually taken up front, kind of like a paycheck. What people may not think about is that even if they take the taxes out up front, they still have to file a tax return later, even if they don’t have to pay extra taxes. Again, a good financial planner will help with this and should know a competent tax attorney and accountant.
A lot of lottery winners actually seek out a financial planner after they win, it’s a good move and I couldn’t recommend it more. However, the rate of bankruptcy among lottery winners would suggest they don’t heed the advisors advice or find good advisors. There are more than a few people out there who are willing to let you part with your money into their pockets and they have no ethical boundaries to stop you from giving it to them, even if they don’t deserve it. The other factor often is family. I don’t care how much an advisor pleads with someone, they aren’t likely to say no when Mama has her hand out again. Add that to the temptations of living large on money that is a gift, it’s really no wonder that people end up broke and poor all over again.
Remember this if you do win; this money really is a great gift. It was given to you without you earning it and now it’s yours. You bought a ticket, that’s it. It is your job now to steward this money and use it the best way you know how. The first thing you should do when you find you’ve won is meet with a financial planner. They can work out a plan with you to ease your way into this new life, and it is a new life.
The thing you must NOT do is tell anyone that you have won the lottery. You just shouldn’t do it. In all the years I’ve seen people win these lotteries, the one thing that makes everything worse is getting other people involved in the process (other than a qualified financial planner and tax professional). If you tell others, not only will the hands start coming out, all expecting a piece of the action, but they will start trying to manage your money for you. I’ve seen it and it’s not good. I can guarantee you that your financial planner will have much better advice than your parents or brother-in-law. Even if he’s a financial planner himself.
If you can manage it, try to withhold your name from being released. Some states won’t let you withhold your name, but they will let you set up a corporation and that entity will accept your winnings on your behalf. That way only the corporation’s name is released and your’s is obscured. I say obscured because a truly resourceful person might be able to find your name if they wanted, corporate documents being public record, but if someone is trying to find you that intently, it’s a fair bet that they want your money. The press often respects the winner’s privacy if they use a corporate name instead of their real names and won’t dig too much into it in order to release your names. If you can keep your name private, and don’t tell your family or friends that you won, then you can live simply for about a year and ease into the new phase of life.
Recently I met a couple who did this and they ended up being very happy and successful with their winnings. They won $7 million in a state lottery and took the lump sum payment which cut the winnings in half. After the tax man had his cut they were left with about $2 million dollars, a pretty hefty amount of money. Although that might not sound like a lot when you think of the hundreds of millions some people win in the lottery, it’s actually enough to retire on if you live modestly and don’t make any rash purchases. The first thing this couple did after they left the lottery office was find a credible financial advisor to work out a personal investment plan so that the money they just won would grow instead of just be spent. Once the financial plan was created, they went home, sat on the couch, and watched the boob tube. Sound ridiculous? Maybe, but that kind of money can really mess with you if you let it and it can be gone in a few months if you aren’t careful. Sure, they both quit their jobs (though they both ended up taking part time jobs later), paid off their house, and set up college funds for the kids, but they generally acted like the lottery hadn’t happened. No speed boats, no new cars, no big vacations. They let their winnings grow for a year and then carefully made some purchases. They are very happy now.
I know that this might sound silly to you. How could you not go a little crazy when you win the lottery? Sadly, many people do just that. They get this big amount of money and have no financial skills to handle it so they spend it like they do all their other money and go broke very quickly. Waiting to buy the big ticket luxury items isn’t exciting, but it is the best course of action. It will give you the discipline to keep this gift of money for longer and hopefully bless more people. This couple now spends time with the kids, and grandkids, travels for a few months every year, and now has time for their hobbies like writing and pottery. They live off the interest of their investments, and without a house payment or debt payments, are doing very well for themselves.
I can’t stress enough that if you happen to win the lottery, this is the couple to emulate, not the broken stories you often hear about that waste away this gift. This couple never bought anything crazy and just stayed sensible, and now they have all the freedom in the world. They also never told their family about the lottery winnings which I think helped them immensely.