8/20/2012 2:15 PM ET|
You won the lottery! Now what?
Everyone knows what to do first: Jump for joy. But the moves you make after that are crucial, and missteps could cost you dearly.
Michael Lang's boss had just two $5 bills in his wallet when Lang came by to collect for the weekly office lottery pool.
The boss hesitated after opening his wallet, so Lang reached over and plucked out one of the bills. "You don't want to be sitting here if we win," Lang remembers saying.
The next morning, Lang was home sick from his job as a child-support investigator. When the boss called, Lang made his apologies and offered to come in if they really needed him. "Forget about that!" his boss said. "We won the lottery!"
That was in 2006, when 13 members of the Missouri child-support-enforcement team shared a $224.2 million Powerball jackpot. For the past five years, Lang has been living the life that lottery-ticket buyers dream about when they shell out their cash.
And it's a good life, Lang is quick to point out. He was able to retire early and pursue a long-held dream: owning a hunting and fishing lodge. But it's also been a stranger and more complex journey than he could have imagined.
"I thank God every day for being blessed this way," Lang said. "(But) everybody does take some advantage of you when they find out you have money."
We talked a while back about what Lang has learned about how to win the lottery. Such as:
Don't rush to claim the prize
One of Lang's regrets was that he let his co-workers' enthusiasm trump his natural caution. A former St. Louis police officer, Lang was wary of the attention and bad guys the publicity could attract, but he wound up acceding to the group's wish to claim the winnings shortly after the prize was announced.
If he had it to do over again, Lang said, he would put off claiming the prize while lining up the financial professionals he needed to help him manage his share.
"I just wanted to be able to prepare for it," Lang said.
If you value your privacy, you may have the option to collect your winnings without a news conference, although your name and hometown typically must be made public.
Another tip: Get an unlisted phone number as soon as you can. People from around the globe are going to try to reach out and touch you for loans, gifts, charitable contributions and funding for their great business ideas.
Get your team together
At a minimum, you'll need an accountant, a lawyer and a financial planner. Don't expect much help from the lottery itself, because it can't risk the legal liability of offering advice. Plenty of financial professionals will offer to assist you -- Lang said he and his co-winners received "hundreds" of pitches from financial advisers of all stripes -- but without significant research you won't be able to tell the crooks and incompetents from those who know what they're talking about.
Lang said many of his encounters with these advisers weren't good. One lawyer told Lang he could quickly prepare a trust for $17,000 -- a trust Lang actually had done for $2,500. A financial adviser Lang interviewed but opted not to use sent him a bill for $450.
"I sat in his office and drank a bottled water, and he wanted me to pay $450," Lang said. "I asked him to itemize what he did for me that was worth $450, and I never heard from him again."
You may not be able to rely on friends and family for referrals, unless your nearest and dearest happen to be multimillionaires with advisers skilled in managing big sums. You may instead want to find out who advises the wealthy in your community and start your interviews there. But don't assume the rich always know what they're doing. Think Bernie Madoff.
The Certified Financial Planner Board of Standards has advice about choosing a planner, and the American Institute of CPAs can direct you to a certified public accountant with a financial planning designation. The National Association of Personal Financial Advisors represents fee-only financial planners, many of whom specialize in "high-net-worth individuals" -- that is, rich people.
Lang started his search for legal advisers by asking who represented the largest companies in St. Louis. A Catholic, he settled on the company that advised a Catholic church in his area.
You also can use your team as a barrier between you and all the people who want your money. Friends, relatives and complete strangers can be directed to make their pitches to one of your advisers. Lang didn't do that, and he made a few as-yet unpaid loans.
"I guess they figured they didn't need to repay me because I had money," Lang said.
You might route them all the marriage proposals as well. Lang said he got letters from former girlfriends saying things like: "Why did we ever break up? We were soul mates." Uh-huh.
Decide: Lump sum or annuity?
Winners typically get to choose whether they want a series of annual payments that will add up to the total they won, or a lump sum, which is a dramatically reduced amount. With a lump sum, it's assumed you can invest what you get and earn over time what you would have received with the annuity option.
Most of Lang's office mates chose the lump-sum option. After dividing the pot 12 ways (two women went in together on one share of the pool), the $18.7 million each share was worth under the annuity option was discounted to an $8.5 million lump sum per share. Those who took the lump sum then had to pay federal income taxes at top rates on their award. (Between the lump-sum discount and taxes, you can figure on netting about one third of the nominal amount you win in a lottery if you take that option.)
Lang, by contrast, took a partial lump sum and gets the remainder in an annuity, something he chose in order to spread out and reduce his overall tax bill.
You theoretically can wind up with more money by taking the lump sum and investing it wisely, but:
- Your tax bite may be significantly larger.
- Your investments may not perform well.
- You may spend too much and have too little left over to invest.
Plus, if you really mess up, you can lose all or most of your money. If you take the annuity option, you still have the next year's payment to look forward to.
A disadvantage to annuity payments is that inflation can erode your buying power. Some lotteries, including California's Super Lotto Plus, increase your payments over time to offset inflation's bite, but others pay out the same amount annually. With even a moderate 3% inflation rate, your buying power could be cut in half by your last payment.
The lump-sum-versus-annuity equation is complex enough that you should discuss it thoroughly with your financial team before deciding how to take the money. But here's one way to start assessing which is better:
- Do you carry credit card debt, get a big tax refund and occasionally (or always) scramble to pay bills? The annuity option is often a better, safer bet for those who struggle to live within their means and have trouble managing their money.
- Do you have a big emergency fund, sizable retirement accounts (for your age at least), no consumer debt and enjoy learning about finance? The lump sum may work for you, but you'll want to consult your financial experts about the tax and investing implications.
Get ready to quit your job
What's with those lottery winners who say they're going to keep working, huh? Well, some may not have won enough to quit (although a $1.25 million net lump sum should replace a $50,000 annual income, if you tap 4% a year to start). But many of those who say they're going to stay on the job don't realize how much life will change, Lang said.
Lang liked his job -- "I was good at it" -- and tried to keep working for three months, but he found the atmosphere at work quickly got poisonous. Some of those who didn't play the lottery that fated week were resentful, and one threatened to sue him.
"I said, 'Go ahead. I can afford a much better attorney than you can,'" he said.
Even harder was juggling a day job with the new requirements of money management. It's a complex job dealing with a small fortune, even when you hire help. Lang had to learn about investing, tax and estate-planning issues that never would have come up before the lottery win. On a given day, his investments may be up -- or down -- $50,000, which is more than his annual salary used to be. For a workaday guy, that's a big adjustment.
"It's a whole different mindset to get used to that," Lang said. "I had to get used to the idea of not having to go to work. Now my job is going to be watching my money."
Manage expectations -- yours and others'
Winning the lottery means you'll receive a lot of money. It doesn't mean you'll receive unlimited money. It's still possible to spend too much, as lottery winners who lost their millions can attest.
Lang watched some of his fellow winners "buy new cars and shiny new houses" -- and one spent $20,000 on Christmas decorations -- but he was slow to change his own lifestyle. He realized that bigger homes come with higher costs for property taxes, insurance, maintenance, repairs and even utilities. Just as he needed to get used to the idea of not working, he needed to get a feel for how far his money would go.
He also let the three children he raised as a single father, who are now in their 30s, know that their lifestyles weren't going to change. "I raised them to be self-sufficient," Lang said. "They know if they really need something, I'll get it for them," but Lang said he won't be doling out cash until he's dead and they inherit. "It's not there for you right now" is the way he puts it.
Figure out what you want to do when you grow up
As a child, Lang spent a month every summer in northern Minnesota, an area he grew to love and planned to retire to one day. His lottery win allowed him to become a partner a Montana wilderness lodge.
"I'm not the type of personality who can do nothing," Lang said. "I've got to keep my mind going, have something I'm working on."
And yes, he still buys lottery tickets.
"A certain percentage (of winners) win again," he said.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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