But some of us continue to cross our fingers when we buy a ticket, even when the odds of winning big are worse than getting killed by fireworks or being born with extra fingers and toes.
Fortunately, recent data suggests that lotto playersâ€™ hopes of life-long financial security are not entirely in vain. In a study published by the National Bureau of Economic Research tracking the trajectories of 3,362 Swedish lottery winners, researchers found that most large-sum winners still had more wealth 10 years later than they would have otherwise, and furthermore, reported greater life satisfaction.
(The National Endowment for Financial Education also recently set the record straight about the oft-cited, fictional statistic that 70% of lottery winners lose it all in less than a decade.)
Still, if you donâ€™t want to wind up broke after winning it big, a little bit of planning might help.
Human beings are social animals. And if you win the lottery, chances are your first impulse is going to be to shout it from the rooftops.
But if you want to keep your money, you probably want to keep your lips zipped.
Because once your friends, family and long-estranged acquaintances hear that youâ€™re rolling in dough, theyâ€™re all going to want a piece for themselves.
While many lottery winners do make gifts to family and friends, doing it on your own terms (and in your own time) keeps the control in your hands. If you donâ€™t set boundaries and make a plan, things can go awry quickly â€” and when it comes to planning for millions or billions of dollars, youâ€™re going to need some professional help.
You may also want to look into hiring a risk advisor who works specifically with wealthy clients, whose insurance needs differ substantially from most of society. If you get into a car accident or someone gets hurt on your property, your entire portfolio could be at risk â€” so you need to ensure youâ€™ve got an appropriate amount of coverage.
Lottery winners have two choices when it comes to receiving their winnings: they can take a lump sum, or have the payment distributed over time in the form of an annual payment (also called an annuity).
And while there are good arguments for either option, thereâ€™s no cut-and-dry way to determine which is better for you.
Obviously, many winners find the lump sum to be the most attractive option, because who hasnâ€™t gabbed around the watercooler about what theyâ€™d do with a six- or seven-figure windfall? Whatâ€™s more, if you invest a lump sum wisely, you might be able to earn even more cash in capital gains and appreciation.
On the other hand, itâ€™s exactly that kind of watercooler fantasizing that could lead you to financial ruin. Itâ€™s all too easy to spend every cent of the money when itâ€™s all suddenly in your hands.
The annuity gives you the opportunity to spread out the payments over time and makes it much harder to squander the money all at once. And while every specific lottery program is different, annuity payouts often have an amount incentive (for instance, Powerball annuities increase 5% each year). It can be very comforting indeed to have a guaranteed source of income over the next few decades, even if it means you arenâ€™t a millionaire right away.
From a tax perspective, there may be a significant difference â€” or there may not, depending on how much you win (and whether or not the tax rates change over time). Whether you pay the taxes all at once or each year as the annuity payments drop, a big chunk of the prize money is going to Uncle Sam, and other factors may weigh more heavily on your decision.
The best call is to sit down with your financial planner and do the math. But keep in mind that with the lump sum, you do at least know ahead of time the tax rates, whereas the annuity leaves you with more uncertainty as to how much of the prize youâ€™ll actually receive.
While everyone can benefit from having a solid financial plan, itâ€™s even more critical for those with millions or billions of dollars. When you feel like your pockets are endless, itâ€™s easy to ignore your cashflow altogetherâ€¦ which is one reason so many lottery winners doend up spending it all.
While your financial advisor will walk you through the creation of a specific financial roadmap, here are some of the basic constituents.
Theyâ€™re your winnings, and you can do with them what you want. But for best results (and to maintain your millionaire status for more than a couple of years), avoid these common mistakes.
Winning the lottery is an incredible stroke of luck â€” and despite the misfortune thatâ€™s befallen many lottery winners, it is possible to come out on top if you set up a solid plan. So if you see those winning numbers, go ahead and jump, dance or scream into your pillowâ€¦ and then sit down, take a deep breath and get to work.
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