When you’re buying your lottery tickets, you may be dreaming of all the wonderful things you would buy, all the terrific vacations you would take and all the gifts you would give to family and friends … but only if you win.
What if you actually do purchase the winning ticket? What’s the first thing you should do? After you catch your breath and re-check the ticket, this is the first piece of sage advice: don’t quit your day job just yet!
Seriously. There are important decisions you will need to make if you actually become an overnight millionaire. Keep in mind, this is high-level guidance and your specific situation may differ, but, generally speaking, here’s how to handle your finances if you win the lottery.
Step One: Build Your Team
If you really hold the valid, winning ticket, hire a team of smart, trusted professionals to help you navigate the challenges that loom ahead.
At a minimum you should consider a CPA, an attorney and a financial planner.
The excitement of winning will probably be overwhelming. There are plenty of stories about lottery winners blowing through their fortune very quickly. What initially seemed to be a bottomless pot of gold can be depleted after a series of bad decisions.
Your team may help advise you from poor or hasty judgements (including overestimating the total winnings and underestimating the taxes you will owe). Your team may also help you plan for retirement, pay off existing debts and start an emergency fund.
Step Two: Decide if You Want a Lump-Sum or Long-Term Payout
There are distinct benefits and disadvantages when selecting the up-front, lump-sum payouts or annual installments over two or three decades. This important decision can be based, in part, on the age and life style of the lottery winner.
For those who are under 40 years old, the long-term payout is more sensible. Why? It reduces the taxes that need to be paid up front. But for those who are 50 or older, the most common advice is to request the up-front, lump-sum payout. The concern is an older winner might not live long enough to enjoy the full amount of the jackpot paid out over time.
The advantages of accepting the winnings all at once could help reduce or eliminate unknown situations in which you don’t receive your money. If wisely invested, the lump sum could potentially grow in value beyond the original winning amount. Taking the lump sum means that the taxes you owe will be paid at current rates, acknowledging that future taxes could be higher.
Of course, the disadvantages are obvious. By taking a lump sum, you only receive about one-half of the advertised jackpot (provided you’re the sole winner). If it’s poorly invested or carelessly handled, it can quickly disappear and a guaranteed source of income that cannot be replaced will be permanently lost.
If you’re young and think you’ll live long enough to collect your payout in the years ahead, you may ultimately benefit from a long-term payout in which you receive the advertised jackpot (again, assuming you’re the sole winner).
With a long-term payout, taxes are calculated on the amount of the yearly payment and not on the full amount of the winnings. That means you’ll likely be placed in a lower tax bracket.
Good planning under a long-term payout process can be beneficial. It gives you time to create a long-term budget that limits the chance of spending the cash all at once or squandering it by embracing poor financial choices.
The biggest disadvantage to this payout option is you won’t benefit from the compound interest generated from investing a larger sum of money rather than an incremental amount.
What Should You Do?
That will be different for just about everyone. Winning the lottery is life changing. But you can increase your chances of a positive experience by making some smart, up-front choices.
You should consider immediately assembling a trusted group of advisors, planning prudently, and constantly be thoughtful about investing and spending. You will also probably need to manage the expectations of family and friends who may anticipate becoming recipients of your newly found fortune.
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Ken Bagner is a Member in Charge of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance in NJ is proud to partner with NJSCPA to bring you valuable tips about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance in New Jersey.