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My Advice to the Mega Millions Winner

Why winning a huge sum of money does not guarantee a life of financial security

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Someone in South Carolina just won the biggest lottery payout in history. The windfall was nearly $1.6 billion (but not really, as I’ll talk about later), and the odds of winning that money were 1 in 302 million.

For many people, winning the lottery is a dream they strive for. Millions of people buy tickets each week, hoping to change their financial lives forever. Interestingly, most people are so focused on winning millions that they never stop to consider what they would do with that money.

Sure, there’s the usual answers about paying off the house, getting a nice car, or going on a vacation, but those are immediate gratifications and done quickly. Then reality sets in as you have a multitude of financial decisions to make and no idea how to make them.

The first decision they have to make is, how do you want your money?

Lump sum vs. annuity

There are two ways the Mega Millions winner can choose to take his or her money: either as a lump sum up front or as an annuity paid out over time.

As CNBC reports, “Mega Millions officials said the winners will have a choice between an estimated annuity value of $1.537 billion, paid in one immediate payment followed by 29 annual graduated payments, or the cash option of an estimated $877.8 million.”

There are many implications to that decision that the average person won’t know. For instance, what will you pay in taxes if you take the money as an annuity vs. a lump sum? Going further, what will be the tax implications based on where you live?

In most cases, it would better from a tax perspective to take the money as an annuity, but it also means you give up control of your own money to the state as Quartz reports:

  • The smartest decision for a lottery winner, and many retirees, is to take the money as an annuity. There are significant tax advantages to taking the money in smaller amounts over time, rather than all at once. It’s also less risky because you don’t manage the money and bear the risk. Lottery winners aren’t known for their money management skills and the annuity ensures large regular payments, starting at $25 million and eventually reaching $100 million (or $56 million after accounting for inflation), over the next 30 years, all before taxes. The annuity puts the investment risk on Mega Millions.

If someone instead decides to take the lump sum, they will be in a for a shock as they realize they didn’t really win $1.6 billion dollars. Why? Because the tax bill is quite hefty. Depending on where they live, they could see as much 45 percent of their earnings gone before it even reaches their hands.

And then they have the problem of figuring out what to do with the money once it is in their hands.

Mark Cuban encourages the winner to simply put the money in the bank:

  • “You don't become a smart investor when you win the lottery,” Cuban told the Dallas Morning News in 2016. “Don't make investments. You can put it in the bank and live comfortably. Forever.”

He contends that “you will sleep a lot better knowing you won't lose money.” He also says that you could try and protect your earnings from inflation by putting, “some of them in a low-cost index fund, which is a passive and safer investing option.”

Of course, the one thing not covered is that your money is only insured by the FDIC up to $250,000 per depositor at each bank. So, the winner would be stuck with a dizzying task of figuring out a banking strategy that would protect an estimated $877.8 million. That’s something most people aren’t equipped to do.

The problem of too much money

At the end of the day, Mark Cuban and others like them are giving advice to the lotto winner because they know that money doesn’t solve all your problems. It does solve some problems, but it also creates many more problems, especially if you have a lot of it and don’t know how to manage it. Thus, the advice to let someone else manage it for you, or to simply find the safest investment vehicle you can in order to hopefully not lose too much—and definitely not win much at all either.

The reality is it takes a very sophisticated understanding of money and how it works in order to take a large sum of money and make it grow. And it also takes the same sophisticated understanding of money to make sure it doesn’t shrink. Invested incorrectly, people can see hundreds of millions of dollars melt away very quickly.

Beyond the investment considerations, money also creates other problems. You become susceptible to scammers who want to use your lack financial IQ to take your money from you. And friends and family come out of the woodwork asking for handouts. Finally, if you don’t feel confident around money, there is a growing and nagging anxiety that can set in as you realize the immensity of what you just got and the low capacity you have to manage it well.

My advice to the lotto winner

If I were having a cup of coffee with the winner of the Mega Millions, I would want to know their motivations in life to give them specific advice regarding their new fortune.

If they have little-to-no knowledge of how money works, and they have no desire to learn, take the money as an annuity. They would save money on taxes, have lower amounts to have to manage over time, and would be less likely to blow it all at once (especially since an annuity has restrictions on giving to friends and family).

If they have little-to-no knowledge of money but they want to learn how to invest, I would again suggest the annuity, but I would then tell them to spend as much time and effort as they can learning how to invest and discovering what their passion is. They would then still have millions of dollars each year to invest and grow, with also the safety of an annuity payment each year if they make a mistake. It’s a luxury most investors will never experience.

If they know how money works and have a lot of plans for that money already spinning, including some great investment options, they might want to consider taking the lump sum and putting it to work in big ways. If they play their cards right, they could be extremely wealthy very quickly.

The point is there’s no clear-cut answer because lots of money is not a simple problem. There are many considerations to take into account. But the first and foremost consideration is, how much do you know about money? Because the answer to that question could mean the difference between living a life of luxury or blowing through a fortune in the blink of an eye.

Original publish date: October 30, 2018

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