Few things get people’s blood pumping faster than the idea of winning the lottery. Over the past almost two decades, I’ve developed a national reputation for advising sudden wealth recipients – individuals that receive a windfall through divorce, inheritance, sports/entertainment contract, business sale, lawsuit, and of course, the lottery. So, what should you do if you win the lottery? Winning the lottery has its own unique opportunities and challenges that are unlike other forms of sudden wealth — there are countless financial, tax, and legal strategies you can take to make the most of your windfall.
1. Not all money is created equally.
Money is money, right? Not necessarily. Although logically we know a dollar we earn is worth the same as a dollar we find, we often treat this money very differently because of “mental accounting,” which describes our tendency to treat money differently depending on its source. A good deal of my work as a sudden wealth advisor is helping clients avoid valuing money they receive from lottery winnings, lawsuits, inheritances or other sudden wealth events as less than money they earn through their labor. The consequences of valuing “found” money differently than “earned” money can be dramatic. People are inclined to take more risk with found money, give it away more freely, and spend it faster and more lavishly.
2. Assemble your team.
When you win a large lottery, you’ll want to make sure you have a stellar team who can help you make the best decisions. And at a minimum, you will want an attorney, CPA, and a Certified Financial Planner who have experience guiding clients who have received sudden money.
3. Decide if you want a lump-sum or an annuity.
With a big lottery win, you will often have the option of taking a lump sum payout or to receive the payout over time. You’ll want your accountant and financial advisor to review both options and discuss the pros and cons of each. The big advantage for taking the money over time is that it provides you with a “do over” card. We’ve all heard the stories of lottery winners who have lost it all in a few short years. By getting the money over time, even if things go badly the first year, you will have 29 more chances to get it right.
4. Make a publicity plan.
In many states, you don’t have the option of remaining anonymous if you win the lottery. As soon as you claim the prize, the whole world will know your name. Journalist and TV reporters will come from far and wide and will all want to talk to you. The best approach is to develop a public relations strategy before you claim the prize. Decide what you want to share, when you want to share it, and if you will be your own spokesperson or if you want to have someone else speak on your behalf.
5. Create and prioritize a wish list.
Newfound wealth brings with it many options — from buying a new house to taking a family vacation to remodeling the kitchen. A wish list allows you to consider them carefully before you write any checks. So take several weeks or months to crystallize your ideas and then prioritize your list entries. You cannot do everything on your list, so choose the items that are most meaningful to you.
6. The 10% rule.
Most likely you will identify purchases of things you’ve coveted or activities you’ve longed to experience. Just make sure you don’t spend more than 10% of your lottery win. While every situation is different, this rule of thumb will still leave you 90% of your lottery to invest and live on.
7. Don’t lose yourself.
Lottery winners often complain that after winning their lives are turned upside down and that they are thrust into a new life. It’s hard to keep things exactly the same when you get a check for millions of dollars, but at the same time, you don’t want to lose the aspects of your life you now cherish. Step outside the craziness of the situation for a moment and make a list of Who and What you love about your life that you don’t want to change. Money is best when you use it to improve your life, not necessarily change it.