So you won the $1.6 billion Powerball lottery jackpot! (OK, play along.) Now what?
Hopefully you’re not still begrudging the fact that you’ll split the winnings three ways and only come out with $533 million. Take heart, we’re here to help, by telling you the ugly, the bad and the good.
“There’s a joke in financial planning circles, if you have an enemy, give them a lottery ticket,” says Ric Edelman, chairman and CEO of Edelman Financial Services. “One of the worst things that can happen to you is to win the lottery.”
The reason? Your life is about to change, particularly your relationships.
After you win the lottery, everyone you know and everyone you don’t know will all ask for money.
— Ric Edelman, financial adviser
“Everyone you know — parents, siblings, friends, coworkers — and everyone you don’t know — charities and complete strangers— will all ask for money. Many are going to expect it; some will demand it. And many people will not be happy for you. They’ll be jealous,” says Edelman.
Americans love a winner, Edelman notes, but define winners as people who achieve success through hard work and sacrifice (titans like Steve Jobs plus millionaire athletes, actors and musicians). “When you win the lottery, you are none of those things. You’re merely lucky, and quite frankly, you don’t deserve to be luckier than me,” says Edelman.
And because people don’t think you should be that lucky, they think they deserve some of your good fortune. After all, they would share with you if they won, right?
If you have grand ideas of working or living in the same place you do now, think again. Resentments will be strong.
You will become the daily reminder to coworkers that they have to work and neighbors will think you don’t belong.
And finally, six pieces of advice for the good parts of winning the lottery:
1. Protect the ticket. If you’re holding a winning ticket, sign it and quickly put it in a safe location, ideally a safe deposit box. Do not carry it around; the ticket could get lost or stolen.
2. Line up an “A” Team. As soon as possible, secure a team of experts. “You need tax advice, estate planning advice and you probably need someone to protect you from the public, often a publicist,” says David Littell, the retirement income program director at The American College.
Among your team of financial advisers, you’ll want at least one person with experience helping clients who’ve received windfalls.
You can, and should, have your advisers be the bad guys. “When anyone asks you for money — whether it’s a charity or an investment opportunity or a friend — you’re able to say: ‘Here’s my adviser’s business card, he handles all of my affairs, you need to talk to him,’” says Edelman.
3. Prepare for the tax man. While you may be aware that the IRS will skim its roughly 40 percent off the top of your winnings, there’s more to the tax equation for lottery winners, says Edelman.
Want to give your mom $10 million? Technically you’re only allowed to give people who aren’t charities up to $14,000 a year without owing a gift tax of another 40 percent. So giving your mom $10 million actually costs you $14 million.
“You’re going to incur not a 40 percent tax but an 80 percent tax,” says Edelman. See why you need a great tax pro now?
4. Discuss with your advisers the pros and cons of taking the winnings as a lump sum or annuity. There’s plenty of disagreement on this subject, but what you decide to do is monumental. “You have the opportunity to have financial security for the rest of your life with this single decision,” says Littell.
Littell says it’s easy to get in way over your head by electing the lump sum, especially if you don’t have a trusted investment adviser. You might not know how to properly invest the money, for example. Then your lump sum could turn into a dim sum.
With an annuity, you can never lose your entire life saving. But you do lose control over how the cash is invested and the amount you’ll receive regularly.
5. Look into ways you can give to charity and trim your taxes, too. Giving a portion of your winnings to charity is an excellent and altruistic idea. But instead of just writing a big check to the animal rescue, say, you might instead set up a private charitable foundation or a donor advised fund, which will let you claim a significant write-off for contributions you make now and allow the money to grow over time. Again, you’ll need an expert.
6. Finally, try not to go bankrupt. Some studies have shown that 70 percent of lottery winners who win less than $10 million are bankrupt within a few years. They fritter away the money. “They think it’s a bottomless pit,” says Edelman.
Littell suggests adhering to the retirement planning rule of thumb of withdrawing just 4 percent of your portfolio each year.
Oh, and before throwing piles of your newfound money at your adult kids (Thanks, mom or dad!), protect them from going bankrupt, too. They’ll need a financial planning education just as you will, so insist they get the resources to handle the wealth.
The Key Piece of Advice
If there’s one general piece of advice financial pros have for lottery winners, it’s this: Go slow.
Take time to figure out how you are going to change your life, your loved ones’ lives and the world.
“When you win the lottery, you win money, you don’t win happiness,” says Edelman.
Oh, and by the way, congratulations.