You may have dreamt of all the wonderful things you would buy, all the terrific vacations you would take and all the gifts you would give to family and friends, if only you would win the lottery.  But what if you actually did purchase the winning ticket?  After you catch your breath and re-check the ticket, the first piece of sage advice to follow is this do not quit your day job just yet!

Seriously, there are important decisions you will need to make if you actually become an overnight millionaire.

Step One: Build Your Team

If you really hold the valid winning ticket, hire a team of smart professionals to help you navigate the challenges that loom ahead.  At a minimum you will need a CPA, an attorney and a financial planner. All too often the excitement of winning is overwhelming and all too often the recipient literally blows through the fortune very quickly. What initially seemed to be a bottomless pot of gold can be depleted after consistently poor decisions.  Your team will help protect you from using poor or hasty judgement regarding overestimating the total winnings and underestimating the taxes you will owe. The team will also help you plan for retirement, pay off existing debts and start an emergency fund.

Step Two: Decide if You Want a Lump Sum or Long Term Payout

There are both distinct benefits and disadvantages when selecting either up-front, lump sum payouts or opting for the choice of annual installments over two to three decades.  This important decision is based, in part, on the age and life style of the lottery winner.

For those who are under 40 years old, the long term payout is more sensible because it reduces the taxes that need to be paid up front. But for those who are 50 or over, the most common advice is to request the up-front, lump sum payout rather than waiting for the full amount to be paid over the next 20-30 years because there is a concern that an older winner might not live long enough to enjoy the full amount of the jackpot.

Lump Sum Payout

The advantages of accepting the winnings all at once include eliminating the risk of an unknown situation that might impact the ability to deliver the funds and also raising the expectation that the winner will live to enjoy the funds.  If wisely invested, the lump sum may grow in value beyond the original amount. Not knowing for sure whether or not taxes will go up over the years, taking the lump sum means that the taxes paid will be at current rates, acknowledging that future taxes could be higher.

Of course, the disadvantages are obvious. By taking a lump sum, the winner ends up receiving only about one-half of the actual cash, and if it is invested poorly or handled carelessly, it can quickly disappear and a guaranteed source of income that cannot be replaced will be permanently lost.      

Long Term Payout

Those younger winners who are confident they will live long enough to collect their payout in the years ahead ultimately benefit from receiving the full amount of the winnings rather than the prorated 50% that occurs in a lump sum situation. Additionally, under this scenario, taxes are calculated on the amount of the yearly payment and not on the full amount of the winnings - which results in the winner being placed in a lower tax bracket.  Good planning under a long term payout process can help create a long term budget that limits the chance of spending the cash all at once or squandering it by embracing poor financial choices as might occur after receiving a lump sum. The biggest disadvantage to this payout option is that the winner doesn’t benefit from the compound interest that would be generated as a outcome of investing a larger sum of money rather than an incremental amount.

Conclusion

Winning the lottery is life changing, but to ensure that it is a positive experience, specific steps need to be followed, including assembling a trusted group of advisors, planning prudently, being thoughtful about investing and spending, and managing the expectations of family and friends who may anticipate becoming recipients of the newly found fortune.   

 

Information from the following sites were referenced in this article:

Forbes. “Ten Things to Do When You Win the Lottery.”  www.forbes.com/sites/deboarahljacobs/2012

www.forbes.com/sites/vanessamcgrady/2016. Women@forbes

 

Spending and Saving. “What to do if you win the lottery.” David Quilty.