From Windfall to Wealth: Financial Strategies for Lottery Winners

The odds of winning the Powerball are about 1 in 292 million, and the odds of winning the Mega Millions are about 1 in 302 million. If you’re lucky enough to win a substantial lottery prize, what can you do to ensure you don’t squander your newfound wealth? First and foremost, know your limitations, and hire professional, competent advisors, including a CERTIFIED FINANCIAL PLANNER® professional. By working with your team, and focusing on the three areas described below, you can help ensure you enjoy your winnings.

Understand the Math and Yourself

The first major decision: Should you take the winnings in an annuity or a lump-sum? There are two important considerations here.

First, are you financially disciplined, unlikely to become a spendthrift? If not, the annuity route may help your winnings last longer.

Second, what is the interest rate used to calculate the annuity payments? You can compare the annuity payments to the lump sum, which is a financial present value, and calculate the associated interest rate. If you can invest the winnings and earn a higher interest rate, then a lump sum might be better.

The big caveat remains: how financially disciplined can you be, from a budgeting and an investment standpoint? If you were to simply spend down your lottery winnings in five years or invest poorly and earn a very low or negative return, then you may look back and realize an annuity might have been the better financial choice.

Create Buckets

Creating buckets can help avoid making bad financial decisions. Lottery winners can create as many financial buckets as they like, but here are three to consider:

• The Lifestyle bucket. What do you plan to spend annually on items such as mortgages, cars, vacations, clothing and personal care? How large that annual spend is will dictate how much of the lottery winning lump sum is in this bucket. You should invest with a focus on capital preservation. Plan not to tap into principal but rather use the interest produced from assets like money market funds, municipal and government bonds to cover these annual financial expenses. Include any remaining funds in the Growth bucket.
• The Growth bucket funds should focus on capital appreciation, meaning invest in stocks, real estate, commodities and possibly private investments. These investments involve risk, but the advantage of this bucket is even if you lose everything, you’ll still be able to maintain your post-lottery lifestyle.
• Finally, we have the Legacy bucket. Not everyone will have the intent or the funds available for this bucket. However, if there are any plans to support family members or non-profits, it would be best to earmark a percentage of lottery winnings from the very beginning to be gifted out over your lifetime. Not every dollar needs to be gifted at once, but deciding on a total percentage early will prevent giving away too much. These funds should be invested very safely, like the Lifestyle bucket.

Protection

Lottery winners need financial, legal and sometimes even physical protection.

From a financial perspective, you need to carry enough liability coverage to protect your newfound wealth. This includes underlying liability coverage on things like houses and cars but also an umbrella, also called a personal excess policy, that will cover financial amounts well above those limits.

Legally, trusts can be established and funded to protect assets from creditors, as well as from legal judgments. These trusts can also assist in the gifting process and limit income and estate taxes.

Finally, physical protection can be necessary, especially for lottery winners who cannot claim their winnings anonymously. The laws regarding anonymity vary from.

Lottery winners are the definition of luck, but it will take a lot more than that to make sure the money can be enjoyed, and it won’t just be another sad story of what could have been. Whether the lottery win is $10,000 or millions of dollars, when your numbers hit and the celebration is over, be sure to find a CFP® professional to work with to ensure you’ll enjoy your newfound windfall for years to come.