Lotteries

What should you do if you win a million dollar lottery?

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2014-07-28 15:02:34
2014-07-28 15:02:34

Advice for "living off the interest" seems to be a popular, if highly oversimplified, piece of advice. What interest? From where?

Most people are probably only familiar with traditional investing methods (e.g., savings accounts or the stock market), which typically offer VERY modest returns. Currently, the best rates on savings accounts are peaking at just north of 1%. Slightly more generous returns can be had, along with increased risk/volatility, from a decent mutual fund, which mightreturn 5-9%. A really good fund could peak around 11%, annualized.

So what does that mean?

Let's start with your one million dollar win, deduct taxes of about $350,000, leaving you with $650,000 (rough estimates, since the total deduction depends your state.) Take that balance, invest it in one lump sum into an account that returned a healthy 6% annually, and you'd be the recipient of a whole $40,000.

That's a lot of interest, but if that's your sole source of income, it's probably far from the fantasy living you were imagining. By the way, most simple types of interest income are taxable. Your modest $40k annual "salary" will be subject to 26% taxation, leaving your "take-home pay" at a whopping $30,000.

The 2011 poverty level for a family of four in the United States? $22,350.

And that's if you don't spend a dime before putting it in the bank.

However, most winners of large lottery prizes spend their entire windfall in five years or less. Clearly, the biggest mistake that people who come into a large sum of money in a short period of time is not thinking ahead to when that amount of money is no longer available. Professional football players are a very good, if unfortunate, example as most file bankruptcy within TWO years of retirement, despite, on average, making about one million dollars a year for several years (not including other income, such as endorsements.)

With that in mind, the first step would seem to be to sit down and weigh the implications of the winnings on your life, quickly establishing limits on how much, if any, you should spend on things that are not essential to your basic health or well-being. Ideally, you would probably not spend any discretionary cash (or credit!) in the near term.

Of course, continue to pay your living expenses and maybe go out for a nice celebratory dinner with a few of your family and friends, but buying a new car, house, or even paying off significant debt (over $1,000) could have significant negative effects on the lasting benefits of your new found "wealth." The best of intentions could turn your dream-come-true into a nightmare.

Next, consider immediately retaining a lawyer. As soon as your smiling face is splashed across newspapers, television and the entire Internet, all manner of shady characters will suddenly appear, quite literally, on your doorstep. As the saying goes, a fool and his money are soon parted. And if you've ever done something as simple as buy a car, you know that there are people that are very good at parting you from your money.

Statistics show that most people are not very good at managing the money they already have, let alone one million dollars, so another thing you may want to do is hire an accountant, preferably one you know. If you don't know one, ask people you trust for a referral. Your bank probably has contacts that can get you started off on the right foot, though of course they are going to be biased towards their own products.

Beyond that, think positive and keep your wits about you! You've beaten the odds, but don't let yourself become a statistic.

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