How to Invest Powerball Jackpot Winnings
Winning the lottery does not ensure a solid financial future.
- 1. Where to Save Your Money if You Win the Lottery
- 2. Tax Strategies for Lottery Winners
- 3. How to Create a Revocable Trust as a Lottery Winner
According to Bankrate.com, two-time New Jersey lottery winner Evelyn Adams spent through $5.4 million in jackpots, saying, “I won the American dream but I lost it, too.” The same article goes on to say that of the 12 things people spend money on when winning a lottery, investing ranks number 11. Planning and investing correctly can help ensure that your Powerball winnings last a lifetime. Along with reaching your financial goals, you can even take care of other people and have some fun in the process.
Consider Your Goals
When you receive any large financial windfall like a Powerball jackpot, consider your goals before you invest or spend any of the money. You can outspend any amount without a plan and end up bankrupt. You can divide your money according to your goals. Set some aside for fun, some for charity and some to fund family trusts. Allocate another portion to grow for the future. Money allocated for each will be invested differently to reflect your goals.
Consider Your Financial Situation
If you have large amounts of student loan debt, consumer debt or other financial obligations, take care of these before you do anything else with the lottery winnings. While it may seem like a small amount compared with the jackpot, it is better to have all of your obligations taken care of. Also consider any future needs, such as college education for your children or potential long-term care for your parents, when determining how to invest the money.
Invest for Principal Safety
Part of your winnings should be invested with the goal of keeping the principal safe. You can use the Certificate of Deposit Account Registry Service to invest up to $50 million in certificates of deposit and maintain the FDIC insurance on that amount. The CDARS does this by splitting the money among many banks, so as not to exceed the limit on FDIC insurance at each bank. You could do this yourself, but CDARS allows you to receive one statement and one Form 1099 at the end of the year. You can also invest in Treasury bills, which are guaranteed by the U.S. government. With a large sum of money like Powerball winnings, you can invest conservatively, still earning a substantial sum each year.
Invest for Growth
Growth investing with such a large portfolio becomes a luxury, since you can generate enough income from the invested funds to live comfortably. However, you still may want to boost some of your winnings over the long term, depending on your goals. In this case, traditional long-term investments such as growth stock mutual funds, bonds or growth stocks will work nicely.
The taxes on investment gains and interest earned on such a large portfolio can be substantial, since your marginal tax rate will increase as your income rises. Consider tax-free municipal bonds for some of your winnings. While the interest rate will be lower than what you may earn elsewhere, the earnings are free from federal income taxes and sometimes state taxes.
According to Bankrate.com, two-time New Jersey lottery winner Evelyn Adams spent through $5.4 million in jackpots, saying, "I won the American dream but I lost it, too." The same article goes on to say that of the 12 things people spend money on when winning a lottery, investing ranks number 11. Planning and …
Why millionaires need a plan
By Stuart Ritchie – August 25, 2020
The first time we helped lottery winners was back in 2014.
They’d originally won £13 million.
They felt like they could do pretty much anything.
No worries for the rest of their days.
But like many of the senior professionals we help all over the world.
They were lacking one important thing.
Before I helped these clients, I remember reading about Colin and Chris Weir from Scotland.
They were Europe’s biggest lottery winners in July 2011.
The husband and wife were catapulted into the Sunday Times Rich List above Beatle Ringo Starr and Sir Tom Jones with their £161 million win.
Their dreams had come true.
I also read however, that for lottery winners, statistics show 70% end up broke.
A third go on to declare bankruptcy.
And for many, money doesn’t always equal a care-free life.
(Many famous faces have also taught us this).
Our lottery winners were aged 52 and 57 at the time of their win.
A labourer and bank cashier, living in a modest three-bedroom terraced house.
Their joint income was £45,000.
Having cashed in their ticket.
Their net-worth now resembled many of the successful international professionals we help every day.
But by the time they sought financial advice, they had £8 million left.
£5 million spent.
On a dream home abroad, two new top of the range BMW’s.
Plus six more properties for family and friends.
Even though they were living their dream life overseas.
They were becoming worried, frustrated and anxious.
Like so many who feel uncertain about achieving their ideal future.
They didn’t have a plan.
And without a plan, millions can become thousands in no time.
Nothing lasts forever
Since The National Lottery started in 1994, over 5,000 millionaires have been created in the UK.
But how long do they remain so?
Several winners who have scooped millions of pounds have ended up spending it all with little or nothing to show for it.
When Pete Kyle won a £5.1 million jackpot in 2005, he said it was “like a dream”.
Stunned, the retired Royal Artillery gunner vowed the money was “going to change” his family’s life.
And for a while, it did.
He took his relatives on lavish holidays, bought cars and boats and swapped his home for a luxury five-bedroom mansion boasting a steam room, bar and pool.
But just three years later, Pete was reportedly broke and on benefits.
He had squandered an eye-watering £4,600 a day.
And was now in his retirement years.
While Pete was spending, the costs of goods and services was rising.
He didn’t have a plan to last his lifetime.
No savings or investments.
What if I told you, that for people with 40 years until retirement, £10 million is the amount they should be aiming to save?
That’s a lot of money, by anyone’s standards.
But inflation means £10 million may just about cover a comfortable retirement.
£1 million will have the same spending power as £306,000 today.
£10 million will equal £3,060,000.
Our lottery winners now had £8 million left.
They were heading for financial disaster in their early 70s because they had started to spend their winnings at an unsustainable rate.
Their general spending had spiralled out of control at £280,000 (after tax) per year, as well as one off expensive gifts.
The result if they carried on like this?
They would have to start selling the houses they had bought for family and friends.
And if they kept up their spending and tried to match inflation for 30 years, then their main home would need to be sold too.
Even lottery winners need a financial plan
By carrying out lifetime cash flow modelling , we were able to illustrate the point at which they would actually run out of money .
A example cash flow plan looks like this:
This sobering realisation led to them to follow this three-point plan:
1. Get professional advice
Our clients’ lives had changed forever.
The drudgery of things like bank accounts and wills needed to be sorted.
Not to mention estate planning and tax planning.
It was time to do the maths.
Put their life into numbers.
To partner with a fiduciary who was ethically bound to have their best interests at heart.
Not sell them products they didn’t need or understand.
One who would take the strain and leave them with a feeling of clarity, confidence and control over their ideal future.
2. Plan now, spend later
Most wealthy people talk about their investments, not their spending.
Our lottery winners agreed to stop spending large lump sums and focus on the long term.
It was time to start thinking about the future.
(Theirs and their loved ones, who they wanted to continue helping).
To get back control.
They needed to put their retirement plans into action, while there was still time.
3. Invest systematically
The couple needed a globally diversified portfolio of low-cost investments, within their low risk tolerance.
A clear and simple way to preserve and grow their wealth over the years to come.
Choosing a globally diversified portfolio meant they would benefit from the growth of the entire market.
Avoiding trades that attempted to predict what’s ‘hot’.
(Needles in haystacks).
Once set up, it would be left alone.
Letting the markets work for them.
A lesson you can take from this case study
Investing for the future always makes more sense than spending in the now.
Build your wealth so you can get and keep the life you want.
Spend less than you earn and invest wisely.
Take financial advice while you’re in the strongest position to do so.
Don’t put it off and risk frittering away your opportunity.
If you feeling in any way confused, frustrated, annoyed or lacking a plan, it’s time you got a second opinion.
Because there’s never a better time to sort your financial position out than right now.
This is the true story of one lottery-winning couple who were losing sight of their ideal future, because they were lacking one thing…