I read a story last week about a British woman who won the Euromillions
lottery at age 17 and now wants to sue Camelot, the U.K.'s national lottery,
for ruining her life. Many readers were probably thinking, I'd love to have the opportunity to ruin my life by winning millions...
But many people who suddenly come into a huge fortune find
themselves more unhappy than they were before the money.
According to a recent article in Fortune magazine, the Certified
Financial Planner Board of Standards says nearly a third of lottery winners end
up declaring bankruptcy. Bankruptcy also plagues many pro-athletes who grew up
poor and then suddenly signed contracts for multi-million-dollar salaries.
Before you get your hands on a fortune, it's important to
understand how to manage it. Or at least enlist advice from someone you trust.
Preferably someone who doesn't have a stake in it.
It's almost impossible to keep a huge windfall a secret. Relatives
and old friends you haven't seen in years—people who never gave you the time of
day before—suddenly become your best friends. Everyone has their hand out. Sob
stories. Guilt trips. Debts you'd forgotten about. Childhood promises. Investment
proposals. "Expert" advice.
And then there are all those shiny objects. The sports car or
yacht you've always dreamed about but knew you could never afford. Real
jewelry. Designer clothes. Maybe a better place to live. Luxury travel. And of
course, the opportunity to play Santa Claus for your family and friends.
You tell off your boss and quit your job.
But no matter how huge the windfall, it's not a bottomless pit. Up
to 45% of your winnings may go to federal and state income taxes. And if you
start doling out gifts exceeding $10,000 in value, you pay gift tax. That new
mansion has to be maintained, and you may have to hire people to run it. The
new sports car comes with expensive insurance.
Still, even after you pay the taxes on a multi-million-dollar
jackpot, a lot of money is left. A lot of potential for improving one's life.
Some lottery commissions give winners the option of having the
winnings annuitized over 20 or more years. You end up keeping more of the
money, with a lower tax bill. While most winners opt for the bird-in-the-hand
lump sum, I believe I'd take the deferred pay-out. That way, if I went crazy
and blew through my winnings the first year, I'd have another installment to
look forward to the following year. Surely after a few years, I'd grow
accustomed to the income and learn to manage it sensibly.
I wouldn't make any sudden changes—quitting the job, moving, buying
a business—unless plans were already in the works. I'd pay off any debts and
fully fund my retirement account. I'd set aside a million or so for an
emergency fund / long-term care plan. If I had kids or grandkids, I'd take care
of their college funds.
I'd give a lot to charity. Besides supporting causes I believe in,
the donation would lower my income tax bill and would not be subject to gift
tax.
And of course, I'd have some fun. Take more trips. Buy presents.
And invest most of the windfall—after carefully researching opportunities. I'd
still stick to no-load, low-fee products I can understand. I still wouldn't pay
more than necessary for purchases. I'd still recycle and conserve electricity
and water.
Money doesn't guarantee happiness. But when used responsibly, it
can make life easier.
What would you do if you suddenly received a huge sum of money? I'd
love to hear your comments.
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