By: Preston Mangus
We all dream of it: winning the lottery and kissing all our problems goodbye! Well, maybe…
I recently met a lucky fellow who had won $2 million on a scratch-off lottery ticket. His odds of winning were approximately 1 in 2.76 million, according to the Florida Lottery, so he was a very lucky man indeed! (And by the way, he was already an active saver for retirement as well. Lucky and smart.)
Meeting him got me thinking about how that kind of windfall income could affect someone and their financial planning. The research has been interesting—and surprising.
First, don’t let the huge jackpot amounts fool you; most lottery awards are based on an annual annuity payment basis, meaning payments are spread out yearly over a significant number of years, typically 20 to 30. If you elect a lump sum award, the jackpot is reduced by 50 to 58%. And then there are federal and state taxes. Years ago, I had known another lottery winner who won the New Jersey lottery for $13.2 million and elected the lump sum payment option. After the adjustment for single payment and the application of effective taxes at the time, his net winning was reduced to about $4.7 million. Still a great sum of money, but significantly lower than the jackpot. Whether it’s a better choice to take the annuity or the lump sum is a huge question—it could probably take up a whole other blog post—but that’s not my point here.
The point is, whenever anyone has a large sum of money come their way through the lottery, an inheritance, a legal judgment award or the sale of property (aka windfall), it can have an immediate psychological effect on that person. Researchers suggest that, much like finding money on the ground, the thought process of unearned income is quite different from our work earnings. We think of windfall money as an exceptional gift—not subject to the usual constraints of our hard-earned income—and we spend accordingly.
The record of folks with newfound wealth is checkered at best. In fact, many lucky lottery winners in retrospect say it was the worst thing that ever happened to them. The stories of “rags to riches to rags again” are heartbreaking and common. From those who spent uncontrollably, got scammed, gave away money to friends and family, and wound up filing for bankruptcy, to those who even lost their lives. There are certainly too many stories about windfall income gone bad to enumerate here, but what are the lessons to be learned, and how can one prevent an unhappy ending?
First, it’s best to take some time to cool off and gather your thoughts when you’re suddenly hit with a financial windfall. Don’t race to get the cash in hand without a plan, because you could run the risk of blowing your money all at once if you don’t know how to properly manage it. If you’re lucky enough to have a fortune of any size fall into your lap, here are some suggestions that can lead to a happier result:
It can also be very stressful when people find out about your new and unexpected fortune. Be wary of newfound friends and distant family members who seem to want to reconnect out of the blue, and avoid falling for sketchy “fool-proof” investment opportunities anyone might try to offer you. Remember, if it sounds too good to be true, it probably is. A financial windfall can be a gift or a curse. Take the time to consider your blessing and what you’d like accomplish with it. Just try to be the same person with the same values you had before, and everything should work out.
But, back to reality. According to CBSN, the odds of winning the Powerball Lottery are 1 in 292 million. By way of comparison, the odds of being killed by lightning are 1 in 161,000; being killed in a car crash, 1 in 645. And, sadly, most of us won’t have that long-lost rich relative kick us a ton of money either. Most windfalls will likely be modest, but impactful. The good news is the previous suggestions will still apply in that situation.
That means it’s back to the venerable practice of saving for the future ourselves. Your best bet to accumulate wealth is to work at it over the longest time possible, starting as early as possible. Saving consistently 10 to 15% of your income, taking advantage of retirement matching and tax deferral, and investing for the long term are the most assured methods of wealth accumulation. Not glamorous, but much better odds!
I’d like to think that I would be a responsible person if I hit the lottery, but who knows. I still wouldn’t mind the opportunity to find out, though. Oh, I also asked the recent scratch-off winner if he was going to play the big Powerball Lottery because he was obviously lucky, and he replied, “I wouldn’t want to win that much money!” Lucky and smart. So, as they say, play responsibly—and realistically!
Now tell us below: What would you do if you suddenly came into a wealth of epic proportions?
The content provided in this blog consists of the opinions and ideas of the author alone and should be used for informational purposes only. VyStar Credit Union disclaims any liability for decisions you make based on the information provided.