How to Avoid Going Broke After Winning the Lottery

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Updated on Friday, November 22, 2019

We’ve all heard the horror stories of people who play the lotto (and actually win!), only to end up broke (and substantially more miserable) just a few years later.

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 players’ 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 don’t want to wind up broke after winning it big, a little bit of planning might help.

Talk to professionals — and no one else.

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 you’re rolling in dough, they’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 don’t set boundaries and make a plan, things can go awry quickly — and when it comes to planning for millions or billions of dollars, you’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 — so you need to ensure you’ve got an appropriate amount of coverage.

Determine the payment strategy that works for you

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, there’s no cut-and-dry way to determine which is better for you.

Picking the lump sum

Obviously, many winners find the lump sum to be the most attractive option, because who hasn’t gabbed around the watercooler about what they’d do with a six- or seven-figure windfall? What’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, it’s exactly that kind of watercooler fantasizing that could lead you to financial ruin. It’s all too easy to spend every cent of the money when it’s all suddenly in your hands.

Opting for the annuity

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 aren’t a millionaire right away.

Tax implications

From a tax perspective, there may be a significant difference — 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 you’ll actually receive.

Come up with a financial plan

While everyone can benefit from having a solid financial plan, it’s even more critical for those with millions or billions of dollars. When you feel like your pockets are endless, it’s easy to ignore your cashflow altogether… 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.

  • Budget: Yes, you still need a budget, even if you’re a millionaire. And if you weren’t making a large income before you won, your existing budget may need substantial revamping.
  • Investing: What better job for your windfall than to be fruitful and multiply? A thoughtful investment strategy, be it for beginners or for long-time pros, can help make your prize grow over time, and a qualified financial advisor will be able to help you make smart choices. (Though keep in mind that no investment strategy is risk-free.)
  • Long-term savings strategy: Millionaires still need to plan and save for retirement if they want their wealth to carry them through the end of their lives, and they should still reserve some of their wealth as an emergency fund, as well. Although investing is a great way to grow your money, your emergency fund should be highly liquid — that is, easily accessible, perhaps stored in a high-yield savings account.
  • Charitable giving: Many high-net-worth individuals make sizable donations to existing funds, or even start their own foundations. And while charitable giving is a great way to get a tax break, the best gifts are for causes the giver is actually passionate about. (After all, most of those gifts are irrevocable, and whether it’s picking an existing fund or creating your own, there’s a substantial amount of legwork involved).

Avoid common mistakes

They’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.

  • Splurging and impulse buys. Yes, of course, you’re going to want to buy something to celebrate. But unchecked spending can blow up your budget, no matter how big that budget may be. Before you go too crazy, ensure you have a plan in place to fund the essentials as well as the fun extras.
  • Immediately quit your job. As fun as it is to fantasize about a dramatic walk-out, you may not want to throw in the towel just yet. Even with a large sum of money, quitting your job could lead to unexpected consequences (like having to purchase health insurance through the marketplace, where your monthly premium might be hundreds or even thousands of dollars). Again: just make sure you’ve thought it all through!
  • Making financial decisions that can drain you. Malik S. Lee, CFP and founder of financial advising company Felton & Peel Wealth Management, warns prize winners against what he calls “endless decisions” — that is, purchases that have potential to cost a lot down the road. That could mean purchasing a luxury yacht or investing in an area business you’re unfamiliar with, but either way, beware of spending that begets more spending, and more after that.

The bottom line

Winning the lottery is an incredible stroke of luck — and despite the misfortune that’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 pillow… and then sit down, take a deep breath and get to work.