Several university studies have shown that the more you win, the more likely you are to go broke.
70-90% of lottery winners end up broke within five years and back to work which also applies to large inheritances. Sudden wealth is more often a long-term curse as the vast majority exercise little or no self-control.
The vast majority of people take the after tax lump sum payout which is roughly 30% of the overall pot. They feel like they have become financially invincible. But the odds say different. For almost everyone, the safer play would be to take the long-term annuity payout and ensure at least a few decades of solvency and enjoying the money.
For those who choose the lump sum payout, the first thing to do is basically NOTHING! Carve out a tiny piece and go on a little spending binge, but that’s it. Nothing more than maybe a percent or two.
Just like when a college football or basketball player is drafted in the early rounds and signs a big contract with a fat signing bonus; friends and relatives come out of the woodwork with their hands out for charity and business opportunities.
Resist the urge.
Hire a lawyer and financial adviser to run interference as the gatekeeper while you and your team formulate a plan for the future, especially the estate plan.
Change your cell phone number.
Invest the vast majority of the money in short-term treasury bills for the next 90 days.
After that, presumably when the proper trusts have been established, the winner can start investing like an endowment or family office would. You and your kids and your kids’ kids are set for life. Don’t screw it up!
Work on an asset allocation to fixed income, equities and alternatives that protects the majority of principal over time. Then dial down each area more granularly.
For example, US versus international equities. Developed versus emerging markets. Passive versus active. For fixed income, create a bond ladder using investment grade corporate and municipal bonds to fund your lifestyle.
Don’t go crazy on the alternative side. You are already rich and you want to keep what you won, not roll the dice. Allocate to private equity and hedge fund managers with long-term track records of modest returns. Overall, keep the aggressive investments to 10% or less.
These are not decisions to be made quickly or in haste.
Continue to say NO as your default answer!
Paul Schatz, president of Heritage Capital LLC