Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
The winners of Friday’s record-busting Mega Millions lottery beat some incredible odds. A lottery player was nine times more likely to be hit by a falling TV than to win that jackpot, according to USAToday. Now those folks face another difficult challenge — holding onto the money.
As a financial planner I’ve worked with several lottery winners and others who have unexpectedly come into life-changing money. Such a windfall can be a blessing or a curse that quickly destroys the winner’s life. One study says more than half of big lottery winners are broke in just a few years. Probably because those winners, like most Americans, didn’t have a plan in place to handle their regular income – let alone a massive influx of cash.
Here are some pointers for managing a huge financial windfall:
Stay calm. Put the money in the safest place possible for three to six months. That means an FDIC insured bank account — possibly several of them, depending on the size of your treasure. Parking the dough will give you time to get over the initial shock and devise a strategy for managing your new fortune and the challenges that come with it.
Get help. Find a financial planner you trust — someone whose advice makes sense to you. Don’t jump into investments simply because they sound like fun (a bar or restaurant) or because you want to make your brother-in-law’s dream come true. I have seen people lose millions of dollars on such deals.
Lay down the law. Determine a policy for family members who ask you to buy them stuff or lend them money. If you don’t have a plan to ward off moochers, your money will be gone before the next jackpot makes the news. Maybe you want to establish a designated pool of money for lending to friends and family. You might also want to set loan-size limits, or turn all lending/charity decisions over to a board of advisors whose judgment you trust.
Have a plan. Develop a strategy for achieving your financial goals. This, of course, applies to everyone, regardless of income; Regular readers know I’m a big fan of the “bucket” approach to income investing. Here’s how it would work for a Mega Millions winner. A Georgian who had won the entire $640 million jackpot would have about $375 million for a well-diversified income-based portfolio after taxes. Using the bucket system, I would invest five percent in short term Treasuries for maximum safety, and another five percent in gold as an inflation hedge not correlated to the stock market. That would leave about $337,500,000 for the Income and Growth Buckets. The Growth bucket would include a diverse mix of dividend-yielding stocks. Moderate yielding dividend-paying stocks are currently generating income of about 3.5 percent. The Income bucket would include a high percentage of tax-free municipal bonds as well as MLPs and energy royalty trusts paying a “tax-advantaged” average yield north of 4.5 percent.
If one-half of the invested winnings yields 3.5 percent, and the other half 4.5 percent, the $337 million would have an overall average yield of four percent. That’s four percent every year in income alone, which comes out to about $13,500,000 per year — or $36,986 a day. You would still have to pay taxes on a portion of the cash flow, but if you could live off just the income, you would never have to dip into the principal — nor would anyone in your family for generations to come.
Think you could outspend that kind of income? What would you do with the money?
– By Wes Moss, for Atlanta Bargain Hunter