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Some Financial Planning Advice to the New Powerball Winners & Other “Victims” of “Sudden Money”

| April 20, 2017
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We have all heard the phrase “be careful what you wish for,” and for the new Powerball winners, this could definitely be true. Why did I refer to them as “victims” of “sudden money?” Well, It’s been thoroughly documented that many people who come into a great deal of sudden wealth soon begin to view it as a curse. Not only do they get bombarded by the media with requests for interviews, they also begin to find they have many more family and friends – in need of loans and special financial favors – that they never realized they had before. And that’s assuming they don’t succumb to the “fantasy life” that often comes with that much money, which could lead to participating in risky behaviors resulting in addictions, being ripped off or being sued. Many lottery winners suffer from a great deal of pressure & depression and the illnesses that result from it: such a “fortune” can actually rip a family apart.

It’s a critical that newly-wealthy individuals recognize that the “honeymoon” stage (the “high” that follows the news of such wealth) cannot last forever. They need to decide whether or not to use their new money as a tool to control their lives, or let the money control them. Here are some financial planning tips to help enable the any recipients of sudden wealth to not become victims of it:


  1. Try to keep it quiet.

    Resist the temptation to broadcast the news of your winnings to everyone you know or post this information on your social media networks. As noted above, people who you haven’t spoken to in 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.


  1. Do nothing at first. Develop a plan for how to handle your winnings.

    Of course this is an exciting time, but it’s not wise to go out and buy a new mansion, yacht or luxury car right after you win big. Find a good Certified Financial Planner who has experience helping clients deal with unexpected windfalls, who will, in turn, also help you find a good CPA and tax attorney as well. These professionals can help you determine if you should take the full payout or the annuity option, and help you develop a plan for how to use your newly-found fortune. You need time to figure this out.


  1. Determine what you will actually net from this sudden money.

    The actual federal tax rate is likely to be higher than you are used to paying. When taxable income goes north of $415,050 (depending on your marital status) tax rates go as high as 39.6%, depending upon other factors such as types of income, deductions and exemptions. Additionally, depending upon where you live, your winnings may be subject to state and local income taxes. Certainly if the jackpot is huge, it may not matter, but it’s important to consider your tax situation before you commit to spending any of your winnings. 


  1. Decide on a savings plan.

    Before you start spending anything, decide on what you want your lifestyle to be and if your new fortune, properly-invested, can sustain that lifestyle for the rest of your life. A major lottery win doesn’t have to be a one-time blessing. Have your financial planner forecast this out for you - at various scenarios (best, worst, median) - so you know what you are dealing with. This income planning will also drive what investment plan you need. With smart planning, part of your lottery win can be put to work for you, potentially earning many times the average annual salary, just for parking that portion and leaving it alone.


  1. Pay off your debt.

    First things first. Once your savings plan is in place, before buying any “dream assets,” pay off any debt that you have acquired over the years. Being able to say “goodbye” to student loan debt, car payments, credit card debt or remaining mortgage payments can almost be as exhilarating as winning the fortune itself. 


  1. Think about your family’s future.

    After you have addressed your lifestyle needs, think about how best to benefit your family that will have a long-term impact. What about setting aside a college savings plan for your children or grandchildren? How about helping your grown children buy their first home (with a downpayment, not the whole house)? At this point, it might be good to talk to your financial planner and estate planning attorney about how best to protect your newly-found fortune from creditors and “predators” for yourself and your family down the road. In addition to getting a good set of estate documents, the use of trusts and asset-protected investments should likely be part of this discussion.


  1. Consider giving back to charity.

    If your financial plan shows that you now have more than enough for your needs during your lifetime, and your children will also be well-provided for, wouldn’t it be nice to consider giving back to one or more charities that you care about? You can be generous without giving everything away. Consult your financial planner to determine an appropriate gift. Don’t forget: these contributions are tax deductible!   

  1. Don’t stop working entirely.

    It is important to have a purpose when you wake up in the morning. You may not want to keep the job you had prior to your sudden wealth, but you should find things to do that fulfill you and keep you occupied. It may be volunteer work at a local school or charity, or perhaps pursuing a time-consuming and expensive hobby that you haven’t been able to pursue previously. Maybe you’ve always wanted to continue your education or try a different career. If you are no longer reliant on your paycheck, you can try just about anything. But it’s important to find your “mission” in life and stay engaged. To do otherwise may invite the “curse” that sudden money has inflicted on others.

If you are a recipient of sudden wealth, congratulations! Now come and see us so we can help you with the steps I have outlined above.

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