Though the lottery is a dream for many, it seems to be a nightmare for those who actually win. According to the Times, 70% of those who receive a windfall of money will lose it all within a few years. Some of them will end up destitute; others will even end up dead. Why?
In a recent, high-profile case, a lottery winner fought to stay anonymous. This was important, because in many states the lottery winner needs to publicly accept their prize. This may seem odd, but there’s a rationale to it: if the prize isn’t accepted publicly, it’s not easy to show that the lottery was legitimate.
When a lottery is won, the winner has to prove they had the winning ticket. They then need to determine the terms of their lottery winnings: lump sum or installment.
Lump sum payouts are generally far lower than the total installment amount, but it gives them the advantage that they can use the lump sum now to invest. Installment amounts are higher and come with fewer tax payments attached, but they also mean you need to wait for the money.
If you cannot remain anonymous, your name will be publicized — and that’s where the difficulties begin.
Why do so many people lose millions of dollars? Some people even lose hundreds of millions, which can seem like an insane amount to just lose. However, there are a few factors involved, and it isn’t just about being “bad with money.”
If you haven’t remained anonymous, your friends and family will soon be crawling out of the woodwork for money. Many lottery winners find themselves giving a substantial amount of their money to these friends and family members — never to be seen again.
Lottery winners may also find themselves the target of numerous lawsuits, as people will now know that the money is available. Even though these lawsuits can be frivolous, they will still cost money to defend against.
Even if you have remained anonymous, there’s another catch: the people who play the lottery frequently are often people who aren’t experienced managing large sums of money. Many people have been used to spending money when they have it and consequently don’t know how to invest it wisely.
Even those who are smart enough to try to invest are often the targets of con artists, and it can be difficult for them to identify the real opportunities fro the fake ones. And many aren’t aware of the costs of upkeep that their newfound wealth will require — expensive homes and expensive cars cost a lot to maintain.
It’s more likely that most people will get hit by lightning than win the lottery, but it’s not entirely impossible. If you do win the lottery (even a reasonably small one) there are a few things you should do:
First, remain anonymous if at all possible.
Immediately hire an attorney and an accountant — one with a good reputation and who has no preexisting relationship with your friends and family members. If you aren’t experienced in investing, invest in reasonable investments such as diversified stocks, mutual funds, and bonds.
Avoid telling anyone that you have won the lottery, and avoid changing your lifestyle significantly without consulting with your accountant.
Consider the long-term costs of a purchase as well as the sticker price, as the lottery money may be all you have to work with for quite some time.
Lastly, know yourself. It’s financially always better to take a lump sum payment, but if you know you will blow through it, an installment payment could actually make more sense for you.
None of that means that you shouldn’t go into a business venture or start funding new enterprises, but it’s telling that most people lose their money within a few years. Taking some time to acclimate to your new wealth — especially if you decided to take the lump sum payout — could make all of the difference.
Some lottery winners find themselves wishing they had never won the lottery at all. More money means more responsibility, and the psychological weight of it can be immense. Of course, there are a lot of lessons to take from that for the traditional entrepreneur. Being a successful entrepreneur can make you a target; it’s important to be careful and cautious when managing your money and your success.
Regards,
Ethan Warrick
Editor
Wealth Authority
