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Advice for lottery winners: 70 percent lose it all in 7 years

By
From page C1 | December 02, 2012 |

Some incredibly lucky people in Arizona and Missouri are going to have a very merry Christmas.

The holders of two tickets had the good fortune of picking all six winning numbers in one of the biggest Powerball jackpots in history — a staggering $587.5 million.

Financial experts have a few nuggets of advice for these newly minted millionaires (and anyone else who comes into sudden wealth) to help them avoid becoming yet another riches-to-rags story.

First of all, hold onto a winning ticket. Stash it in a fireproof home safe or a bank safe deposit box. And don’t share the news with anyone, especially if you plan on keeping that ticket in a home safe.

Next, get a team of financial professionals in place. Winners need a certified public accountant, a lawyer and a team of financial advisers.

“The key is to make sure you have multiple sets of eyes watching everybody,” said Andrew Stoltmann, a Chicago securities lawyer. “The problem is when you have one person — a financial adviser or a CPA — being responsible for everything. That’s when problems pop up.”

Stoltmann added another word of caution. “Once that ticket is turned in and you have the check, you shouldn’t deposit it in the local bank,” he said. “The FDIC limits ($250,000 per account) would only cover a fraction of the prize if the bank goes under.”

Instead, he suggests taking the Powerball check to a large brokerage firm, such as Goldman Sachs or Merrill Lynch, which are institutions the government feels are too big to fail.

The Powerball winners will likely want to quit their day jobs, but Eric Tyson, author of “Investing For Dummies,” noted life goes on. If they do quit, they need to give lots of thought to what they want to do with the rest of their lives.

“Everyone likes the idea of being instantly rich, having anything you want and never having to work,” he said. “But most people overlook the enormous responsibility and the potential downside of instant wealth. I would take things slowly, and recognize you will need a lot of education as well as potential advisers.”

Beware of jealousy and envy, too.

“You need to understand how people who know you will be affected by the news,” Tyson said. “Some people may expect you will do things for them. You may feel obligated to share with people you care about. But you need to take time to think through what you want to do with the money.”

Beth D. Lynch, of Schneider Downs Wealth Management in Pittsburgh urged winners to watch out for family members and friends who come out of the woodwork with their hands out. She said the lottery winners also should consider making conservative investments.

“Even if they decide to only put some of the money in CDs and municipal bonds, they could live off the interest,” she said. “Even at today’s low rates, that would still be possible, considering the amount of money that is involved.”

Kate Byrne, a senior wealth manager at PNC Wealth Management, said advisers there often work with people who have received multimillion-dollar personal-injury settlements and unexpected inheritances.

She suggested that instead of taking the state annuity payments, lottery winners should take the lump sum payout because they can buy a private annuity that pays more.

Although more than 90 percent of winners take the lump sum, Stoltmann believes it is best not to.

“If you make the common cataclysmic mistakes that so many lottery winners make the first year, you’ve got major problems,” he said. “Whereas if you take the payments over 25 years, you can make those bad mistakes and have 23 or 24 more years to go.

“There are studies showing 70 percent of lottery winners have no money left after seven years. If you have payments coming to you over 25 years, you will be in good shape.”

Scripps Howard News Service

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Discussion | 2 comments

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  • JohnApril 03, 2013 - 1:13 pm

    I have a neighbor that won $1 million in the lottery, paid off some stuff and then put it all into investments. He has four kids and a wife. Since they don't have much earned income, they are collecting food stamps and getting all of the benefits of being low income. The wife is working at McDonalds a few hours month to show that have income so they can qualify for all of the low income benefits. It's a total game of the system.

    Reply | Report abusive comment
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