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Sudden Wealth:  Lottery Win Thumbnail

Sudden Wealth: Lottery Win

Insights Sudden Wealth

It is the quintessential definition of sudden wealth.  But if you're the lucky one, what do you do now?

Let us dispense with any jokes about having "made it," or "struck gold," if you've won the lottery you're probably a regular person, with a whole new set of problems that you've never dreamed of before.
When you bought your lottery ticket you probably dreamed of a new house, new car, nice vacation or perhaps quitting your job - not losing friends and becoming a spectacle.
Having money means that you need to manage money.  But there's more to it than that.  You also have to manage expectations of the people around you and, depending on the amount of money you've won, many of your goals and dreams may change. In fact your whole self identity may be in jeopardy.  How does one go from being a "regular person" to a "rich person" without changing their self identity?  If you've only won an amount that can be absorbed into your life without changing who you are then you might be one of the lucky ones, but whether you've won $1,000,000 or $60,000,000, when we're talking about that many zeros something is certain to change.   

Seek Advice

Perspective is critical.  When you're making big decisions about money it always helps to have some trusted professional advice.  Your own proximity to the decisions and their outcomes can cloud your judgement or cause you to be irrational. Impartial and independent advice can help provide you with recommendations and perspective from outside that sphere of influence.  

When you really boil it down, money is just numbers.  It's just math, rules and equations - purely logical and without emotion.  However having money feels good, and it buys things that feel good, and as soon as you're talking about feelings we are not using logic anymore; our emotions have crept in.  

Next Steps

Start by taking inventory of your hopes and dreams.  Keep in mind that these could be completely different than they've been in the past, and don't be surprised if your spouse surprises you with some ideas that appear outlandish at first.  Try to avoid associating a price with each item, instead focus on what will make you happy.  Rank your choices in order of importance to your happiness (and not chronologically or by cost).  It's very important to include your spouse in these discussions if you have one but at this point I would suggest avoiding including other important people such as children or other family members.  Now is a time for you to reflect on what makes you, and only you, happy.  

Only once you have determined what makes you happy and have ranked them can you start to put dollar amounts on each item.  A trip to Australia?  For how long, and what will the total cost be? A donation to your favourite charity?  Monthly or one-time?  Now, or later?  If you're going to help out family members or friends ask yourself who, how much, and in what way?

It helps to go through this process with a financial model created in financial planning software.  This is where having a good financial planner will start to be helpful.  When inputting these expenses into the model, you will be able to see the long term effects of your decisions and you'll know if you are getting ahead of yourself or being too generous before you've ever committed to anything.  It is much less likely that you will make an irreparable mistake if you know what the consequences are before you make a commitment.  


Investing could be different for you as well.  Some lottery winners have never invested a dollar in their life, and now are responsible for millions. Even if you have investing experience, it's important not to let your newfound wealth sway your natural tendencies too much.  If you've always been a conservative investor then there's no reason to suddenly jump into venture capital just because you have the cash to.  In fact, many people with significant wealth are LESS aggressive with their investments, and this makes sense if you think about it for a moment.  Let's say you have $100,000 to invest and the market goes down, and you loose 10% of your investments, that's only a $10,000 loss.   But if you have $10,000,000 in investments, that same 10% loss is equal to the disappearance of $1 Million Dollars.  Don't lie to yourself that you can handle it, start slow and work your way up if you're comfortable with the volatility.

As a lottery winner, you've been given a hen that lays golden eggs.  Of course, if the hen stops laying eggs, you're out of luck.  So the tricky part of winning the lottery is committing to NOT spend the winnings, but rather spend the returns the winnings generate.  

Some math:  Let's say you've won $1 Million.  
You might invest your winnings and expect to earn 5%, or $50,000/year
(most lottery winners should be more conservative than the average investor). 
However, you'll need your winnings and the income to increase with inflation.  So you should leave 2% or $20,000 in the portfolio, and plan on spending $30,000/year.  

If you start by deciding how to spend $1 Million, then you're very likely to have spent it all in a short period of time.  If you instead focus on spending only $30,000/year, you'll make the money last and have a significant estate to leave to the people you value the most (assuming that you have set such a goal for yourself in the previous steps).  

If you're not sure you can comfortable handle the ups and downs of the investment markets, or you're naturally a spendthrift then there is nothing wrong with guaranteeing yourself some income forever.  You can do this using an annuity.  To simplify things, you would pay a lump sum to an insurance company and they would pay you an income back for the rest of your life.  This way you can't spend it all, can't loose it all, and can't end up in the newspapers as that person who won big and went broke.  

Above all, make all efforts to keep a level head and make prudent decisions, with a view towards the long term results that you want.