Why do we hear stories about people waiting days to collect their multi-million-dollar jackpot lottery winnings? Could they have forgotten they bought a ticket on that date? Unlikely. Gamblers don’t place bets and then move on without a second thought.
We buy the ticket. We watch the drawing. Our number comes out. Now what? The lottery office is always closed until morning, so we’re forced to wait several hours. As the magnitude of what just happened sets in, emotion becomes calculation. That’s where we want to be.
Preparing to be a winner
Winning the lottery or collecting a windfall like an inheritance or lawsuit settlement isn’t the same as taking out a debt consolidation loan to pay off credit cards. It’s a free pass. All debts could be cleared. Cash could be available to finance your dreams. Are you ready for that?
Having a lot of money, earned or otherwise, is a responsibility. If you’re about to come into a large sum of cash, it’s best to step back for a moment and digest exactly what that means. Once the shock wears off, you’ll find that there’s some careful planning in your future.
Consult with a financial professional. If you’re getting a really large amount, you might want to speak with an attorney, too. It could be better to form an LLC or trust to receive the money, cutting down your tax liability. You don’t want Uncle Sam to get it all, do you?
Financial planning and spending your windfall
Don’t be afraid to buy yourself something nice when the check comes in, but also don’t blow it all on a yacht or mansion in the country. That will leave you right back where you started, broke and deeply in debt, only with a higher overhead.
Find a safe place to keep the money. The maximum annual contribution to a 401(k) is $19,500. You can dump another $6,000 into a Roth IRA, $7,000 if you’re over 50. Do that and buy a few bonds or CDs to guarantee at least some fixed income coming in.
Savings accounts are great, but they are low-yield and barely beat the rate of inflation. A financial planner can help you with some better ideas. Maybe an annuity is a good option. Perhaps it’s time to buy a nice income property. Consider these carefully.
Taxes, taxes, and more taxes
The money is not all yours. We live in a “free” country where every penny we make is taxed by the IRS. Don’t start spending money until you’ve consulted with a tax professional. Lottery offices take state taxes directly out of your winnings, but the feds will still want their piece.
There are separate tax rates for different types of income, and there are ways to shelter money or defer tax bills. If you won the lottery, be prepared for the solicitations where others tell you they have solutions in these areas. There are a lot of scams targeted at lottery winners.
Having lots of extra money to play with may seem like a solution to all of life’s problems. If that money is managed properly, it could be. If not, your problems are just beginning. Ask questions. Do some research. Talk to a professional. Make a few donations. You’ll be okay.
Just don’t give anything to long-lost family members who come out of the woodwork when they hear you’ve come into some money.
By Kevin Flynn
Kevin D. Flynn is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.