But What If You Win?

We all dream of hitting it big in the casino or lottery, but what happens if we actually do? Would we be prepared for the tidal wave of decisions and risks that would accompany a big payout? A little site by Bob Sanford, Certified Financial Planner has some excellent hints for the would-be-winner.

Take a peek:

RULE 1:
Be Prudent.
A $1 million jackpot is not a $1 million prize: You're a thousandaire -- not a millionaire.

Many people are surprised to learn that lottery jackpots are paid over 20 to 25 years and the IRS withholds 28 percent federal income tax from each check. You've won! If, for example, you win $1 million, most states pay you $50,000 a year for 20 years less 28 percent federal withholding tax, leaving you with $36,000 a year. You may also have to pay additional income taxes when you file your retum, depending on your overall financial situation. The problem is that the $36,000 you receive today will only buy an $11,225 lifestyle 20 years from now, when the checks stop. There are no cost-of-living increase provisions for lottery payouts.

A better option for many is to take one lump-sum payment -- if you can get it. Only Arizona, Colorado, Ohio, and Oregon currently offer lump-sum options to new winners, and none to former winners. How much do they pay out? Forty to 50 percent of the jackpot amount. Still, over half of the eligible winners opt for the lump sum -- as well they should.

If you average a 10% return on investment, you can double your money every 7.2 years. In consecutive sets of seven years, $1 becomes $2, $2 becomes $4, and $4 becomes $8. At about the same time that the serial lottery payments would stop forever, you have increased your lump sum by a factor of 8 ($1 becomes $8). By taking a net lump sum today of $300,000 ($500,000 less 40% in taxes) and investing wisely instead of taking the $1 million jackpot in 20 payments (at $50,000 a year), you can have $2.4 million in the bank after 20 years and live off the interest forever. The wisdom of accelerating jackpot payouts is so compelling that our investment group has already helped over 44 lottery winners trade-in all or a portion of their lottery payments for cash-in-hand.

Those are some wise words, and there are plenty more to be had at Bob's little corner of the web.

February 19, 2007

But What If You Win?