Recent Powerball awards have been upwards of more than one billion dollars, while many other lotteries have seen their pots grow substantially in recent years. This has been accompanied with many news stories about the pitfalls of winning a large amount in a lottery, horror stories about devastation, greed and luck that seemingly ran out. Odds are increasing with the higher jackpots, but even if a client doesn’t bring home the giant jackpot they could always walk away with a sizable sum, oftentimes large enough to warrant protection.
If a client notifies you that they have won a sizable lottery award, they’re going to need to quickly evaluate their options regarding a wealth management strategy as well as a plan to weed out any scammers which, unfortunately according to news stories, could include the client’s family members.
Studies have been done showing that a significant plurality of people, 46%, would call their significant other first if they won the lottery. This is understandable, of course, but what is more concerning is the low percentage of people who said they would call their lawyer upon winning. Only 10% would ask for legal or financial advice. Here are a few ways to make sure your client’s strategy is on the right path:
1) Keep Quiet
It’s important to advise clients against telling many people of their good fortune. With increasing jackpots, there is a proliferation of investment scams specifically targeting recent lottery winners.
Clients will be understandably excited, as an unexpected lottery windfall is most likely among the most exciting news they’ve ever received. Caution lottery winners against announcing it to people outside of immediate family. There are even a few states that will allow winners to remain anonymous, so it is prudent to check with your state’s lottery rules to see if this is an option. Suggest that clients consider choosing a trusted person to be their personal advisor.
2) Suggest against clients taking their winnings in a lump sum
The majority of lottery winnings have a couple of options regarding distribution. Winners can often elect to receive payments over time, or elect to have it paid out all at one. If clients are open to installments, it is often prudent to do so, especially for very large winnings.
This appears to be contrary to conventional wisdom. It is a common assumption that, even after taxes, a strong investment strategy should allow for greater appreciation of assets than the very low-yield, low-risk investments the lottery itself would use to keep assets long-term. However, winners end up retaining more of their overall jackpot if they receive it via a 30-year annuity-style payout. Not only are overall taxes lower, given the smaller payouts, this method gives the winner extra time to adjust to managing massive sums of money and come up with a sound long-term wealth management strategy.
3) Encourage clients to change the way they think about budgeting
This might also seem out of place, but living on a budget is sound advice no matter what tax bracket a person is in. It is well-known that many of the world’s richest people live considerably below their means. Many very wealthy individuals spend substantial time budgeting out their annual expenses. High net worth people often view budget surpluses as an actual expense. Whereas most people would consider a surplus to be an asset, viewing it as an expense allows a high net worth individual to invest in themselves on a regular basis via additional investing, saving, charitable giving. Some will even use those surplus funds to start a new hobby, further their education or something else that leads to greater enjoyment.
While it may seem like the odds are long, lotteries are not the only ways that clients might receive an unexpected windfall. Large inheritances from a long-lost relative still do happen on occasion. Whenever, or however, a large sum enters a client’s life, helping clients be mindful of who knows of the windfall, what are possible payout options available and making sure that a budgeting process is started are all areas where a prudent financial advisor can be of additional benefit before any actual investments with the windfall are implemented.