Dreaming of the Jackpot: 8 Tips to Help You Manage Your Money If You Win Big
Your own private island. A villa in Tuscany. A sprawling mansion in Malibu. A ticket around the world. Oh, the things you could do with $1.3 billion in lottery winnings. But before you get carried away, consider those past lottery winners who mismanaged vast fortunes, losing everything. Don’t fall victim to the same fate.
Live life as usual, until you develop a plan for how you will handle your winnings. You’re excited. Who wouldn’t be? But it would not be financially wise to buy a house, boat or luxury car the day after winning big. You will want to consult both a CPA and a tax attorney who have experience dealing with unexpected windfalls. These professionals can help you determine if you should take the lump-sum or annuity payment option, and help you develop a plan for how to use your new-found fortune.
How much money will you actually walk away with? Just because the jackpot is now advertised as about $1.3 billion does not mean that is the amount that will wind up in your bank account. Winnings of more than $5,000 are subject to a 25% federal withholding tax. The actual federal tax rate is likely to be higher — possibly as much as 39.6%, depending upon other factors such as income, deductions and residence. Additionally, depending upon where you live, your winnings may be subject to state and local income taxes. Of course, if the jackpot sum is enormous, this likely will not make a huge difference. However, it is important to keep in mind.
Pay off your debt. First things first. Pay off any debt that you have acquired over the years. Say “so long” to student loan debt, car payments, credit card debt or remaining mortgage payments.
Plan to Save. A major lottery win doesn’t have to be a one-time blessing. Consider this: even at historically low interest rates, a $10 million deposit into your savings account would net you up to $100,000 annually. Move into more complex investments such as CDs, mutual funds or bonds, and the percentages increase. Roll your dividends back into your investment, and in no time you enjoy the power of compounding interest. Many low-risk investments currently offer returns of 5% or more, which would give you over $6 million above your initial investment of $10 million after 10 years. With smart planning, part of your lottery win can be put to work for you, earning many times the average annual salary, just for parking that portion and leaving it alone.
Think about your family’s future. Have you always longed to be a homeowner, buy a vacation home, have a second car, or be able to set aside substantial college savings funds for your children or grandchildren? If so, you will want to incorporate these items into your plan. And remember to keep in mind that just because you won the lottery does not mean that you should buy a mansion with 25 bedrooms or a $200,000 car.
Try to keep it quiet. Although you will be extremely excited to broadcast the news of your winnings to everyone you know, it would be wise not to post this information on your social media networks or scream it at the mall. As you can imagine, people who you haven’t spoken to in several years may approach you asking for a portion of your earnings, and who wants to deal with that? Additionally, advertising your newfound mega-wealth might make you an appealing target for hackers.
Support charitable organizations. Wouldn’t it be nice to give back to an educational or religious institution, or a charity that you care about? You can be generous without giving everything away. Consult your financial advisor to determine an appropriate gift. Don’t forget: these contributions are tax deductible!
Don’t stop working entirely. It is important to have a purpose when you wake up in the morning. Whether you decide to keep the job you had prior to winning the lottery or not is up to you. You may decide that you would prefer to volunteer at your child’s school or local community center instead. Perhaps you have a time-consuming and expensive hobby that you haven’t been able to devote time to. Or maybe you’ve always wanted to continue your education. Now might be a good time to find ways to immerse yourself in your hobby or go back to school. Or perhaps you wish you’d chosen a different career but were never able to explore it because you were unable to sustain the resultant financial hit. If you are no longer reliant on your paycheck, you can try just about anything. The important thing is to find things that fulfill you, even if that involves sitting on a beach for 365 days with a fully loaded Kindle, deciding what that next move will be.
Alexis Rothberg, Communications Specialist, American Institute of CPAs.
Lauren Sternberg, Communications Manager, American Institute of CPAs.
Jackpot image courtesy of Shutterstock