Published on June 12th, 2014 | by Pete0
Tips for Managing Your Wealth after Winning the Lottery
Perhaps William Shakespeare said it best when he uttered the words to be thus is nothing; but to be safely thus. Lottery winners are certainly in an enviable financial position. A windfall payday is nothing to scoff at, especially if you’re a Grand Prize winner in the Powerball lottery. By matching 5 numbers and the Powerball number, massive cash payouts can be hit. The first investment decision that needs to be made is what type of payout to take from the lottery draw.
There are two options available to players: a cash payout or an annuity. The former option is typically 60% – 70% of the total value of the jackpot while annuities are paid over 30 years with adjustments for inflation. In the USA, lottery winnings are taxable while they’re not taxable in countries like the UK. This makes a significant difference to your available investment possibilities.
Safe Investments for Lottery Winnings
Surveys taken of lottery winners by online lottery operator The Lotter reveal some interesting statistics about what people typically do with their winnings.
An overwhelming number of winners pay off their mortgages on their homes, or simply sell up and purchase brand new homes. Real estate remains the safest way to invest winnings and it’s a generally an appreciating asset that you derive maximum utility from. Considering that lottery winnings are substantial, real estate will comprise but a small percentage of your overall winnings.
Other safe haven investments include certificates of deposit, fixed interest-bearing investments, and specific types of stock market investments. Investments in individual stocks are considered more risky than investments in mutual funds. Mutual funds have the added advantage of providing investors with a wide spread of high performance stocks that tend to perform well over time. Mutual funds cover technology stocks, commodities and all other manner of investment opportunities. It must be borne in mind that investments in the stock market are not without risk, and substantial losses can occur in the event of a re-correction, an asset bubble, or a general decline in global sentiment among others.
Depending on when you win a lottery draw, it is always a good idea to check the general performance of the stock market to ascertain whether you should invest in the stock market or invest in safe haven commodities like gold shares. Gold is the perfect foil to geopolitical uncertainty and stock market volatility. Put simply: when the stock market is up, gold is down and vice versa. When people are bullish on the stock exchange, they are bearish on gold because gold is considered a safe haven investment.
Stash Some Cash for Emergencies
The old saying Cash is King never loses its shine with people. There simply is no substitute for money in the bank when you need it most. Lottery winners are particularly fortunate in that they have substantial cash reserves at their disposal. Depending on the amount of winners, payouts can range from as little as a few dollars to hundreds of millions of dollars. A financial planner may well be a sound investment to ensure that funds are not squandered on fly-by-night schemes. Emergency funds can range from as little as a few hundred dollars to tens of thousands of dollars. These should be held in liquid form so that they can be accessed when the need arises. A standard bank account (checking is preferable) at low interest rates will do the trick.
Remember that the future is just as important as the present and no amount of money lasts forever if it is mismanaged. That is why sound investment advice dictates that a retirement plan – a 401(k) in the US – is an excellent option. Individuals can invest as much is $17,000 per year (this figure changes annually for inflation repurposes) in a 401(k) which over 30 or 40 years can build up into a substantial nest egg at retirement. The 401(k) is considered safe for investment purposes and it offers significant tax advantages in the form of tax deferrals for the investor. Lottery payouts can be considered a type of annuity if you select the 30 year payouts. This will ensure that you receive a constant supply of inflation-adjusted payouts over your lifetime. If this option is selected, the individual payouts will be smaller and more manageable than a single large lump sum.
Risky investment options are also available. To be fair, any investment is associated with a degree of risk. Banks fail, governments fail and stock markets crash, but overall a balanced portfolio of low risk, medium risk in high-risk investments – in the right proportions – will yield positive dividends for investors. The particular risk profile that you adopt is dependent upon the amount you’re willing to invest and your appetite for risk. Technology stocks are generally considered medium to high-risk investments because of the nature of the market. Other high-risk stocks include biotech companies since these are usually associated with massive amounts of capital from angel investors, with no promise of results.
To sum up, any investment of your lottery winnings needs to be measured against the level of risk and the likelihood of an outcome being positive or negative. For example, people are more likely to be involved in a car crash, but only a very small number of people will likely die from a car crash. By contrast the likelihood of being involved in a plane crash is very low, but mortality rates are exceedingly high.