Prudent Portfolio: Here’s a Hot Tip, Don’t Count on Winning the Lottery
By Kevin Peters
Holy moly, a nearly $540 million prize went to an Indiana winner in the much publicized July 8 Mega Millions drawing. While news of the lucky winner might tempt you to participate in the next Powerball drawing to try your chance at a big payday, it is important to take a step back and consider the reality.
The lottery is constructed in a way that makes it unlikely that any particular individual will win the big jackpots; the odds are roughly 1 in 292.2 million for Powerball (although lots of people will win smaller payoffs, say $10 or so).
In my mind, buying a lottery ticket is just a nice way to create fantasies and enhance dreams. Even if you win the big prize, there are still a variety of factors that need to be addressed, including taxes. Before winners even see a penny of their winnings, all levels of the government – federal, state and local – will likely get a share.
In reality, an individual’s odds of a financial windfall are substantially higher through an inheritance, a big gain on the sale of a house, an insurance payout or from the sale of a business. Maybe even through a large bonus from your employer.
Regardless of the source, the first step is to step back – and remain quiet. Try and refrain from telling anyone about your new earnings until you have time to speak with experts.
Also, be smart and not impulsive. Consider the fancy new sports car only after you have carefully thought out your future – and created a clear plan for managing your newfound wealth. It is far better to create and maintain a prudent investment plan based on reasonable assurances of a constant – and hopefully growing – income.
As for the lottery or with any other windfall – expected or otherwise – consulting an accountant is imperative. Note that earnings from a jackpot or any other windfall typically get taxed at the highest federal rate of 39.6 percent. Enlisting the guidance of a tax professional can help you get the most out of your newfound wealth.
And while you are at it, an experienced estate attorney and financial adviser would be good additions to your “team” as well. You might even need someone to help with charitable giving or will revisions.
While too many cooks can spoil the broth, failing to have the right team of professionals in place can make managing a windfall challenging, particularly when long-lost relatives and “friends” come out of the woodwork. Be careful not to jump into investments simply because they sound like fun (such as a bar or restaurant) or because you want to make a family member’s dream come true.
Settling on a clear policy for family members and friends who ask you to buy them things or lend them money can help avoid undue stress. Consider establishing a designated pool of money for lending to friends and family, with set loan-size limits.
You may also want to look into establishing a foundation or a trust. Turning all lending/charity decisions over to a board of advisers whose judgment you trust is another way to manage expectations from charities, family members and friends.
Many people play the lottery faithfully because they believe that eventually the odds will turn in their favor. After all, each week, they have been plugging in family birthdays for over a decade. But consider this: the odds of winning the Powerball jackpot don’t change – it’s 1 in 292.2 million for every individual drawing.
The odds are rarely ever in your favor.
Kevin Peters is a financial adviser with the Global Wealth Management Division of Morgan Stanley in Purchase. He can be reached at 914-225-6680.
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