 |
|
|
|
|
|
|
|
|
|
|
|
|
|
 |
| ||||||||||||
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
|
You’ve Won the Lottery!
Yahoooo! A Winner’s Guide to Lasting Prosperity
by Les Botkin & Sara Botkin, CFP®
It’s July, it’s hot, and the Powerball is climbing. The dog days of summer lend themselves to daydreaming, and who among us hasn’t occasionally daydreamed about hitting the jackpot? No more financial worries for the rest of our lives! We could buy our dream home. Send our kids to college. Travel the world. Give to good causes.
“Winning the lottery isn’t all it’s cracked up to be,” says our friend Gloomy Gus. “Haven’t you seen that Oprah special with all the winners who were broke and miserable two years after they hit?” Yes, and we’ve read about winners who’ve lost their fortunes, divorced, and ended up worse off than before they won the big prize. Makes you wonder, is winning really worth it?
You bet it is – if you’re prepared. Here’s a winner’s guide to enduring prosperity.
1. First things first – once you make your earth-shattering discovery, immediately sign the back of your ticket and put it in a safe deposit box. Then assemble an advisory team of an attorney, accountant, and financial planner. Ideally, you have relationships with these professionals already. If not, ask for recommendations from people you trust, and don’t be shy to interview everyone you’re considering. Believe us, every law and financial professional on the planet wants to work with you now – carefully evaluate their qualifications, records and references.
2. Make it a lump sum. The lottery gives you the option of taking your prize via annual annuity payments or in a lump sum that’s typically around 50% of the advertised jackpot. Unless you’re an incurable spendthrift, TAKE THE LUMP SUM. The annuity is usually paid out over 20 years, and the payments aren’t adjusted for inflation. With the lump sum invested properly, you’ll almost certainly have more money over time. If you average a 10% annual return on your investment (the stock market over time has averaged over 11%), you’ll double your money every 7.2 years. If you’re smart, about the time those annuity payments run out, you’ll have more money than what you started with.
3. Thou giveth, and Uncle Sam taketh away. It’s a testament to the generosity of people that when we took an informal poll around the office to see what folks would do after winning the lottery, most ticked off a list of family and friends with whom they would share the money. “If I won 50 million bucks,” said Doug, “I’d peel off $5 million for each of my two kids, $2.5 million each for my wife’s and my parents, and $1 million each for our five siblings. That still leaves us with more than half the prize.” Er, no Doug, it doesn’t. You see, Doug’s forgetting about a little thing called gift taxes. If Doug gives away $20 million to his family, he’ll owe around $9 million in gift taxes! It’s the giver, not the receiver, who’s liable for the tax. A better strategy would be for Doug to gift over time. Each person is allowed to give up to $1 million dollars free of gift taxes over his lifetime, plus an additional $11,000 per year to an unlimited number of people. Theoretically, Doug and his wife could give $22,000 per year to each of their children, and the same to their spouses. If Doug’s daughter is married with two children, Doug and his wife could give the family $88,000 per year tax-free ($22,000 to daughter, husband, and each of the kids). Our client Janet fantasizes about paying for her 6 grandchildren’s educations. Happily, Janet doesn’t have to worry about gift taxes – she can make what’s called a qualified transfer directly to the university, and no gift taxes would be owed. You can do the same thing with medical institutions to cover medical costs of a loved one.
4. Make it last! Many lottery winners get themselves into trouble because they immediately buy big homes, boats, and luxury vehicles. We’re sure it’s thrilling at first, but the fall from that height must be painful. If you want your lottery winnings to meaningfully impact your standard of living over the long-term, we suggest withdrawing not more than 6% of your lump sum to live on each year. If you win $10 million, that’s $600,000 per year. At that withdrawal rate, your lump sum should grow over time, as can your annual withdrawals. A conservative withdrawal plan also allows you to pass on your wealth to the next generation, leaving a lasting legacy to your family.
Les and Sara Botkin are a unique father-daughter team of financial planners at Hefren-Tillotson, a full-service investment advisory firm headquartered in Pittsburgh. They welcome your questions and comments at (412) 258-1117.
