Picture this: You've just won the New York State Mega millions jackpot!!! You start daydreaming about all the wonderful things you'll buy and all the vacations you'll take. Money will no longer be a worry.
It is not that simple to live on Easy Street. The truth of the matter is if you don't properly plan on how to receive your windfall and invest it wisely, you could instead find yourself on the road to financial disaster.
So, what do you do if you win the lottery?
If by chance you become an overnight millionaire, you might want to consider the following before you quit your day job or buy that new luxury car.
- Take lottery winnings in a lump-sum. If you're disciplined enough not to spend the money all at once, you may want to consider taking it all in a lump-sum. Typically, a lump sum will give you more money in the end than if you were to be given payments over the years. For example, if you receive $1 million and pay half of that in taxes, you'll end up with $500,000 to invest. At a hypothetical 10% rate of return, your winnings would have the opportunity to grow to more than $3.3 million in 20 years. By comparison, if you chose to receive your windfall in 20 annual installments of $50,000 and invest each year at that same 10%, you would end up with approximately $2.8 million -- a difference of more than $500,000. The more money you can get invested right away, the better off you could be.*
- Choose the installment option if you're a spendthrift. On the other hand, if having an account with a lot of money in it is too tempting for you to handle, take your fortune over a period of several years. You may not have this option with every type of windfall, but if you happen to win the lottery, the sponsor may invest your winnings for you. You may get a better rate of return by taking the money in a lump-sum, but that's no use if you end up spending all of it without planning. Remember when it comes to investing there is never one right answer for everyone.
- Keep income taxes in mind. Most likely, about half of what you win will go to pay federal and state income taxes. And remember, a multimillion dollar payout this year would put you in the highest federal tax bracket at 39.6%. Add state income taxes to that, and you may end up losing half of your money to taxes. In cases where winning lottery tickets are purchased outside your home state, it's possible that you would be taxed in your home state and the state where you purchased the ticket. Careful tax planning can help you keep as much of the money as possible. Our firm has a full time CPA available to answer questions and craft tax efficient strategies for clients.
- What happens when you die? If you're married, the money - no matter how much - may be transferred to your spouse free from estate taxes. However, if you're single, the amount totals more than $5,430,000, and you die this year, your heirs may have to turn over 40% of it to the federal government in the form of estate taxes.
As you can see, without careful planning, a seemingly once in a lifetime stroke of good luck could become a nightmare. Consulting with a financial advisor can help you take appropriate steps to help you manage the windfall more effectively in a way that is comfortable for you and is most suitable for your family.
*This example is for illustrative purposes only and does not reflect the performance of any specific investment. There is no guarantee you would be able to obtain a consistent rate of return.
This article was based on an article written by a third party and provided courtesy of Brighton Securities.
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(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).