8/20/2012 2:15 PM ET|
You won the lottery! Now what?
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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