We all dream about it - but what if it actually happened? What if, like those winners of the $656 million Mega Millions lottery, we actually had to wonder now what to do with the money?
What financial planners and people of means advise is that lottery tickets are just that - a lucky win. But there are real issues associated with planning for a sudden windfall.
The Mega Millions winners will now be targets of both legitimate and illegitimate financial advisers, says securities attorney Andrew Stoltmann, who has represented lottery winners who have been defrauded out of the entire amount.
"Jackpot winners are immediately deluged with offers from financial planners, scammers, friends and family to invest," says Stoltmann. "Unfortunately, these instant millionaires often lack experience with managing money and basic investing skills, making them perfect targets for financial scammers."
Here are the steps he advises taking immediately after a newfound fortune is won:
- Keep the ticket safe. The winner is not a true legal winner until the ticket is presented to lottery officials. If the ticket is lost or destroyed, the winner is, as a matter of law, out of luck. Mirlande Wilson, one supposed winner from Maryland who refused to share her portion of that $656 million Mega Millions jackpot with McDonald's co-workers, said last week that she lost the ticket.
- Assemble a team of financial professionals. This should include a certified accountant, a lawyer, and a financial adviser licensed by professional associations, background-checked, and recommended. Few lottery winners have the infrastructure in place to manage a lottery windfall - a team must be put together. And learn some basics yourself, some core financial knowledge. It becomes easier to weed out "professionals" or others that might want to scam you.
- Don't take the lump sum. More than 90 percent of winners do, but it's better not to. Spreading the payments out lets the winner learn investment lessons and apply them over time. Making a mistake with the first year's winnings is not catastrophic if a winner is going to receive another 25 years' worth of payments.
- Keep the money safe. Because a sum in the hundreds of millions of dollars is too large to be covered by FDIC bank-deposit insurance, the winnings should be deposited in a brokerage account of a major broker-dealer, and it should be initially invested in short term U.S. Treasuries until more concrete investing decisions can be made.
- Make no major decisions for six months. It's tempting for a lottery winner to quit his or her job or immediately splurge on a mansion or other large purchase. Don't!
- Set up an estate plan. A winner is likely going to start hearing from family members asking for handouts. Multiple sets of eyes should be controlling everyone who has access to the funds, and a beneficiary or multiple beneficiaries should be set up immediately in case something happens to the winner.
According to the Institute for American Values, based here in Philadelphia, lotteries are not a retirement plan.
Neither are payday lenders - just one of many anti-thrift institutions that take advantage of the working class. Subprime credit-card issuers, rent-to-own merchants, auto-title lenders, private student-loan companies, some franchise tax-preparers, check-cashing outlets, and state lotteries are swamping consumers with the promise of easy money.
In short, America's working class has become its "lottery class," says the institute. The Pennsylvania Lottery system, which relies on heavy taxpayer expenditures for advertising, shows that 50 percent of lottery purchases come from lower-income earners, according to the institute's data.
Long-term investors like local Philadelphia philanthropist John Templeton Jr. recommend that if you want to save, and you haven't won yet, stop buying lottery tickets. "Take that money and open a savings account. If you spend about $2 a day on lotteries - not impossible, right? - instead open a small savings account and compound that over two decades to $25,000."
Yes, I did the math, too. For a nifty calculator that shows the magic of this compounding, check out http://www.bankrate.com/
Erin Arvedlund is a finance reporter in Philadelphia. Contact her at 646-797-0759 or firstname.lastname@example.org. Read more of her columns at www.philly.com/arvedlund