Dear Powerball Winner: Take Our Advice and Take the Annuity

[haele]

91. The big winning lottery winners usually go bankrupt within year 3 to year 5 after a winning.

Those who win a million or under do a lot better than the big winners.

We did a study of the average experience of 12 lottery winners of around $25 - $30 million.
Year 1 - they get the big payoff of $8 - $15 million, pay their taxes and bills, take a couple trips, buy a couple houses and maybe invest in the hobby business - maybe a restaurant, arts and crafts consignment store, a nursery - that they really, really wanted to do instead of what they did for their 9-5 job. Put aside money for the kids. Upshot is, there's an average of $5 - $7 million left over after the spending spree. The leftover money goes into one, maybe two accounts.

Year 2 - More trips. Giving money to friends and family who need it to make it a bit easier for them, and so that they will leave you alone. The business does what businesses do. As personal and business problems arise, they dip into the leftover money to the tune of probably around $500K "no big deal, right?" and there's usually not enough business revenue to make up for the dipping into your lottery winnings. And then there's the taxes and costs to manage money like that - property taxes and business fees, and money management fees, and legal fees (your lawyer and accountant are very happy to have you, at around $10 - $20K a year each...) and, of course, the capital gains/income tax on the interest for money that is sitting in that account -
So that $5 - $7 million ends up being around $4 million, after all is said and done, and you and your spouse are looking at each other trying to figure out where that money went. It's starting to get stressful, because the interest on the winnings just about covers the taxes and fees, and the business is sucking money, and your kids are starting to be whiny brats about wanting a Ford GT or BMW SUV to show off to their friends, because hey, now they've got money....

Year 3 - wash, rinse, repeat of the previous year. You figure you're getting between $80K and $100K in interest per annum on what's left of your lottery winnings, so you and your spouse decide "no more touching the principle, we'll live off the interest". You both decide to switch the accounts to annuities to lock the payments on a yearly basis for the next 30 years, but haven't realized that the fees to do so take about $200K away from you, so you'll actually be making $60 - $80K. Which would be okay, if your business does well...but...
Your business's landlord raised his rent, and there's been an issue with some equipment there. Your business is still struggling to get off the ground. Or your house needs repair work, or a car, or some other major issue. Your accountant may or may not be cheating you. By at the end of year 3, you're down to $2 million, and your spouse is not loving life.

Year 4 is usually when the divorce happens. The business gets sold or closes its doors, the good house goes to the more dependent spouse, and property gets split up between the two of you. You sell the kid's fancy $100K cars at a significant loss because no one would be able to afford the insurance anymore.
You have maybe $800K in the bank to live off, no business, no job, and you're starting over - maybe with child support payments hanging over your head.
So, you can spend that money on a modest new home and go back to school to find a better job than the one you had - draining through the rest of that money for the next 3 - 4 years as you get your degree, or you could "retire" and live off that $800K as sort of a trust-annuity ($30,000 a year for 2% over 30 years) if you're old enough to get Social Security and Medicare to supplement it.

The problem is the windfall most lottery winners have is that the winnings are both too large and too small. People have a habit of living to the financial level that they have at the time, even if they know that level is not sustainable. Most people do not have enough control over their emotions that "well, just a little" or "I always wanted" will usually sneak in because they want so hard. It's worse for people who think they're better than that...and the people you think would be better at handling money - bankers, money managers - actually do worse when they win the lottery.

But, the conclusion from our study is that it's far better for an individual to win between $50K and $500K - just enough to pay off the bills, do some needed repairs, and have a little windfall fun - than it is to win over $2 million.

So that's how most big lottery winners go bankrupt.

Haele