So you hit the Powerball jackpot. What next?
On Wednesday night, Chicopee, Mass., resident Mavis Wanczyk won the $759 million Powerball jackpot. Her first act was to call into work to say she wouldn’t be coming in the next day. Or ever again.
Before she starts celebrating beating those 292.2 million-to-1 odds, there are a few things Wanczyk needs to consider.
■ Lottery winnings are not what they seem: Let’s start with that $759 million prize. Wanczyk, like most lottery winners, decided to take a lump sum rather than equal annual payments for 30 years. Her lump sum comes out to about $480 million, or $336 million after taxes. That’s still a huge amount of money. Often, taking annual payments is safer. There’s no guarantee that you will invest the lump sum wisely and the annual payments reduce the likelihood that you’ll squandering the money as so many lottery winners have in the past.
■ Be wary of strangers, acquaintances and distant relatives: Lots of people come out of the woodwork after something like this is publicized; avoid all of the long-lost high school friends and distant relatives who seem to have suddenly recalled how close the two of you are. If you make any promises to these folks, you could find yourself spending time and money defending yourself in court against the ones who turn out to be parasites.
■ Get some help: Inexperience is dangerous; most lottery winners, like many highly paid athletes, have little background managing big sums of money. It’s a daunting responsibility that can overwhelm one’s better judgment. Find some trustworthy people, including a good lawyer, accountant and financial adviser. Oh, and never give power of attorney to anyone, ever.
■ Just say “No”: Learn to say, “I have a person who handles that.” Instead of wasting time and money on every wacky investment idea your second cousin has, you can have someone else send a polite letter explaining why “we have to pass on this as it does not meet our long-term financial goals, but thank you for thinking of us.”
■ Create a budget: Develop a long-term budget establishing what you are going to buy in the short term (real estate, cars, boats and other toys) and what you are going to live on.
■ Think long-term: At the very least, you will need to think about taxes and estate planning. That’s why you built that team of professionals. You also need to think about your personal security and safety.
■ Money is a tool; what do you want to accomplish with it? This may be the hardest thing about sudden wealth. You may end up establishing a charitable foundation so that any wealth transfers are done in the most cost- and tax-efficient way.
■ Invest intelligently: You want a simple and inexpensive plan to help you achieve your goals. The right portfolio mix should reflect those objectives. The traditional 60 percent stocks and 40 percent bonds should yield an annual return of 5 percent to 6 percent on average. If you are putting money away for future generations or some philanthropic endeavor, then a more aggressive mix will generate higher returns, but with greater risk and more volatility.
■ Learn from lottery history: A windfall seems like it should be bring happiness, but too often more money can mean more problems. The record of sad life outcomes for lottery winners is long and dreary.
So you are now wealthy. You beat very long odds to get rich; see if you can do it again and stay rich.
Barry Ritholtz is a Bloomberg View columnist.
