A lottery win, especially a big one, can be a blessing - or a curse - and the days after a big win are the most critical in determining how your life will be. Because sudden, massive wealth comes with huge responsibility, and sudden wealth syndrome is real. Lottery jackpot winners are more likely to blow through all of their money and declare bankruptcy, get divorced, and... worse.
Remember that you are now in a battle for self-control and planning. If you manage to get everything in order, then you will usher you and your family into hakuna matata land. If you mess up, then you risk seeingyour family members die early, your life filled with divorce, lawsuits and thefts, and getting called stingy, a miser, and being hated because you are not giving your money away as fast as others want you to. So what's a lottery jackpot winner to do? Here are my top 7 tips for lottery jackpot winners:
Congratulations, you've won! The first thing you'll probably itching to do is to tell someone close to you and share the joy (and get emotional support). Some people counsel that you can tell your spouse or significant other. I say “DON’T TELL ANYONE” – “Anyone” means your spouse, your children, your significant other, your parents, your cousins, your best friend, your coworkers… well almost anyone (you can tell your dog). By that, I mean, drive alone, preferably to some deserted parking lot or forest, and then let it all out (with the windows up). The laughing, the crying, the shakes, and the primal screaming. But that’s it. Calm down and collect yourself. Because nothing can prepare you for recognizing that all of your relationships, your friendships, your career, and indeed the lives of you and everyone in your family, have just changed dramatically. And consider this: you might have built up some anticipation and resolve in handling a win – but everyone around you have not. You are absolutely doing everyone a favor by keeping quiet, because everyone’s lives will have changed, as nobody in at least your immediate family will ever have to worry about the things ordinary people worry about – money, debt, work, job security, healthcare, and buying anything you can dream of – and nothing will have prepared them for it. So don’t tell anyone. Not just yet…
2. Protect your ticket
Powerball, Mega Millions, and most other lottery tickets are “bearer instruments”. This means that anyone who holds a winning ticket is considered its owner. That’s why you need to protect your winning ticket – and not just from obvious theft, but from the ticket getting wet, burned, torn up by an idiot clerk, or eaten by your dog. Don’t jump up and down holding your winning ticket. Don’t drink, eat, smoke, or do anything else stupid with the ticket. What I recommend you do is to snap front-and-back photos of the ticket, back up the photos somewhere, and then put the original ticket in a dry, safe, dark, and secret location. Some have advised winners to put the ticket in a bank safe deposit box, but remember the ticket’s value is likely uninsured by the bank, and depending on your bank’s policies and what you told your bank, if the ticket gets stolen, or destroyed such as through a roof leak, or through fire/smoke, your bank will most likely try to find a way to not reimburse you). Winners might consider not signing their ticket immediately, but to hide and protect it, and get legal counsel as soon as possible so that the ticket won't have their name on it, and use the name of a legal entity that protects the winner's privacy instead. The downside to this is that if the ticket gets stolen, then you might be fighting an uphill battle in getting your winnings.
3. Your privacy is key
You have to recognize – and accept – that if people know you have won, many, if not most, will see you as a walking ATM, and no longer an ordinary person. You will get people on the street recognizing you and begging you for money and loans. You will get letters – some true, some fake, some a mix of both – telling you the most gut-wrenching stories of loss and need, and asking for donations. You will get proposals from business people trying to get you to invest in their projects. You will get never-ending calls from charities and money managers. You will have media hounding you and your family forever. You may even invite people to sue you claiming that you stole the ticket from them. Your family members, if they start telling everyone, will suddenly make lots of new, and possibly unsavory “friends”, looking for a piece of your gigantic pie. Do you want that? Do you want that for your family? It’s understandable that many people dream of becoming famous, but lotteries feature these winners because it helps promote lottery sales, and aren’t featured to promote the winners’ own best interests.
4. Do not go overboard – at least not until you’ve prepared yourself and your family
That means no new mansion. Or Lamborghini. Or solid gold Rolex. Or first class tickets to Fiji for everyone in your family. But take your family out to a nice dinner or to the local amusement park. Certainly, you can now afford a few small pleasures, but drastic, and highly visible changes in your spending habits will alert everyone out for a piece of your pie, and destroy your interest in protecting your own privacy. You can wait a little longer, at least until you’ve figured out how to protect your money, your family, and yourself.
5. Your job has changed
Your #1 job now is to plan ahead and secure your life and your family’s future. It’s hard. Where do you start? “You’ll be wise to surround yourself with a team of lawyers and financial advisers.” But what kind of “lawyers” and “financial advisers”? Let me first suggest that you avoid anyone you know, anyone in your hometown, anyone who advertises, and anyone who has no experience with high net worth individuals. The most important thing is to find professionals who you can trust. Your most important goal is to find professionals who have your best interests in mind, those who are not seeking to be on camera, those who will have less of an chance of intermingling their personal interests while working with you, and those who are not going to be tempted to want a piece of your winnings other than being paid their regular fees. Don't agree, sign, or put anything down on paper to anyone, until you are sure of what you are doing. Don’t be shy about getting another professional to help you understand documents if you there is a lot of legalese that you don't understand. You should also seriously consider finding a reputable, trustworthy therapist or other psychological professional (and ask if they also have a therapist of their own - good therapists use their therapists too). Because these are the people you will vent to, ask for advice, and generally lean on for support during this turbulent time. Lawyers and other professionals will be expensive, in the order of tens to even hundreds of thousands of dollars, but what you are paying for is for them to help prepare your entry into hakuna matata land (by creating legal structures that help protect you and your family down the road), and not a life of wealth-filled misery. You are also paying for them handsomely to keep quiet, to respect your wishes while providing you with good advice and carrying out your plans, and ultimately, you are buying professional trust that will pay off in dividends in the long run.
6. Vet your financial advisors carefully
Did you know that, unlike lawyers and doctors who have to be trained, licensed, subject to strict rules of practice, and supervised by regulators, anyone can call themselves a “financial advisor”?. You will also find people working for “wealth management” and “wealth advisor” companies big and small, local and national firms, people working for large banks (ever notice how your bank always tries to sell you all kinds of loans, savings accounts, investment advice, etc.?), and people with a host of alphabet soup titles and acronyms like “CFP”, “CFA”, “ChFC”, “CTFA”, “PFS”, “RIA”, “CPA”, “CLU”, “CDAA”, “CFWE”, “CMP”, “CPIA”, “CWS”, “Enrolled Agent”, and many, many more. Many of them will wear expensive suits, have perfect manicures and teeth veneers, work in a fancy office, drive fancy cars, name drop, boast about their educational and professional credentials, and so forth. They will ask for you to sign lots of documents, and promise you that their job is to promote your best interests. But remember, don’t sign anything while you are vetting them. Don’t tell them you’ve won the lottery jackpot – just say you've come into some money instead, and want to secure your future and preserve your wealth. Your goal is look past their fancy diplomas and sweet talking, and get answers to some key questions: What do they think your goal should be, and what investments are they generally thinking about that are appropriate for you (it should be a structure designed to preserve your wealth)? What has been their performance like, especially compared to benchmarks like the S&P 500? What is their fee structure (beware that some take a percentage of your deposited funds – even if they lose money!)? What exactly are they proposing to invest in (and is it something you can understand)? Do they get paid from the investments that they are proposing to you?
And, since your ultimate goal should be wealth preservation, do you think you really need an investment advisor to do so? What about taking your money and just putting it in a mix of US/Canadian/Nordic/Swiss government debt, index funds, bank CDs and other accounts that are insured by the FDIC, raw farmland and timberland, etc.? And, perhaps, vet attorneys who can help you set up offshore trusts to make sure that all of your eggs are not stuck in one national basket? This way, you skip the fees, the longwinded calls, and the extra risk of yet another pair of eyes - and hands - on your money. But going at it alone takes significant self-control and time investment on your own, so you have to weigh the benefits and risks of your choices.
7. Take the lump sum, not the annuity option
The lump sum cash option is usually less than half of the advertised jackpot for the Mega Millions and Powerball games. Then you have to deduct taxes: federal tax usually takes more than a third off the top; as for state taxes, California residents pay no state tax on lottery winnings, Pennsylvania residents pay 3.07%, and woe to be a New York lottery winner, who will pay a ridiculous 10.9% in state tax on a big jackpot. So a “$1 billion” jackpot win really results in taking home around $300 million – which, although much less than what gets advertised, is still more money than most winners are ever prepared to handle.
In any event, some may ask, wouldn’t it be more prudent to take the annuity option, since you will end up with more money in the long run, and will be protected from yourself in case all of your cash goes missing? There are several reasons why taking the lump sum makes more sense.
First, consider inflation. Countries that you don’t traditionally associate with high inflation are in fact mired in it. Britain is seeing 7.9% inflation right now. Sweden faces a 9.3% inflation rate. Hungary is at 20.1%. Turkey is suffering 47.8% inflation. So that final $20 million annuity payment you or your heirs get in 30 years will be worth whatever has been inflated by that time. The US federal government owes a mountain of debt, and short of massively cutting expenditures or raising taxes, both of which are politically unpalatable, the only other way I believe the federal government can feasibly manage its debt load is either by (a) printing more dollars to pay off that debt, (b) issuing more debt, and/or (c) selectively default on debt obligations. None of these options are good for the value of your annuity payments.
Second, consider bankruptcy – not yours, but of your state or lottery organization! Your annuity is essentially a promise by the state or lottery association to pay you later, and guess what happens to promises in bankruptcy? You’ll get pennies on the dollar, if anything at all. Historically, states have never declared bankruptcy, but I believe that there will be defaults in the future. It’s already happened in Puerto Rico. And Illinois stopped paying big lottery winners when it ran out of cash just a few years ago. Unlike the federal government, which can at least print more money to keep paying its bills, states cannot print their own money. So if you live in Connecticut, Arkansas, Kentucky, New Jersey, and Illinois, you should keep in mind that there may come a time when their 35-45% state pension funding ratio (in other words, these states have a 55%-65% shortfall when it comes to being able to pay their pensioners) will result in major budgetary problems. And when a state is forced to choose between paying tens of thousands of pensioners who have significant political clout, or cutting a single lottery annuity check, what do you think that state will choose to do? Pennsylvania is not doing too well either – our state pension fund is currently experiencing a ~$65 billion shortfall, which is in the bottom 10 of the most poorly-funded state pension funds.
Now, consider this: the total return on investment in the S&P 500 for the past 30 years is roughly 1,000% – meaning, if you had socked away your money in an S&P 500 index fund in 1993 and forgot about it for the past 30 years, you will still be 1,000% richer for just leaving the money in there (not investment advice). Barring a multi-decade stock market and overall economic meltdown (which is possible), it is not hard to more than double your money in 30 years. If you have wisely invested your money, or have hired a team of trustworthy professionals to do so, then you can work to sidestep the whims and mercy of politics and inflation, preserve, and even grow the actual value of your winnings.
In conclusion, it's on you to make the right decisions and exercise self-control now, in order to ensure that you reap the blessing, and not the curse, of a big lottery win.