I’m not particularly proud to admit it, but I’ve played the lottery in the past and can’t rule out doing so again. During my roughly two-year stint working at a store that sold lottery tickets, I estimate — conservatively — that I spent about $250 on scratch-off tickets. Though I remember winning a decent-size prize here and there, I didn’t break even during my employment.
That was OK with me. I played with no real expectation of winning and never with more money than I could afford to lose. Honestly, I played mostly out of boredom and because all my co-workers did. Horrible excuses, but that’s what happened.
Even though I’ve never really dreamed of winning the lottery, as many do, I’d be dishonest if I said I never thought about what might happen if I did score a life-changing jackpot. Like many fellow players, I’m not sure I’d be prepared to handle everything that came next. It seems like every year, news breaks of another multimillion-dollar winner who went broke (or worse) because they weren’t ready to manage their newfound wealth and all the expectations that came with it.
No one wants to look back on a big lottery win and think, “That’s when everything started to go wrong.” But with careful preparation and the right mindset, no one has to. If you’ve recently scored the big jackpot, it’s time to learn what you should do in the event of a significant lottery win: before claiming your prize, during the prize-claiming process, and once the money tap begins flowing.
What to Do Before Claiming Your Prize
Sustained good fortune rests on a solid foundation. After confirming your ticket is indeed a winner but before rushing out to claim your prize, take a pause. Even as you take steps to protect your winning ticket and identity, reach out to trustworthy professionals. They can help you manage your new wealth and avoid making any drastic career or lifestyle changes.
1. Protect Your Ticket
Before doing anything else, take steps to protect your winning lottery ticket. If you lose it and can’t subsequently prove you’re its rightful owner, you’ll be right back where you started. At a minimum, make paper and digital copies of the ticket, preferably in two places: an encrypted cloud storage account and an external drive. If necessary, invest in a home lockbox or safe or store the ticket in a bank safe deposit box.
2. Don’t Rush to Claim Your Prize
Don’t rush out to claim your prize as soon as you’ve secured your ticket.
That’s critical for two reasons. First, if your prize is big enough to attract media attention, claiming your ticket within a week of the announcement risks creating a bigger stir than necessary. Second and perhaps more importantly, waiting at least a week to claim your prize allows ample time to plan for everything that comes next.
You should be able to wait much longer than a week if you wish. Most lotteries give winners anywhere from six to 12 months to claim prizes, but check the issuing authority’s rules to confirm you have as much time as assumed.
3. Don’t Quit Your Job or Spread News of Your Good Fortune
Tempting as the prospect is, the period between the realization you’re holding a winning lottery ticket and the day you step up to claim your prize isn’t the right time to quit your job.
In fact, you shouldn’t tell anyone other than your immediate family (aside from children, who are likely to brag) about your good fortune, least of all your co-workers. The last thing you need is for your boss to begin looking for your replacement on the assumption you’ve checked out and will soon depart for good. Anyway, there’s a small chance you’re mistaken about holding that winning ticket. Perhaps the date is wrong or you misread a crucial number.
4. Hire Professionals
You probably aren’t a tax attorney, a family planning attorney, or a licensed accountant. When you win a lottery jackpot, you need to surround yourself with these four types of professionals in short order. Specifically, you’re looking for:
- A tax attorney who specializes in helping clients of significant means minimize tax liability without running afoul of the IRS
- A family law or estate planning attorney who specializes in customizing estate planning documents like wills, trusts, and prenuptial agreements. You can also take care of these documents online through Trust & Will.
- A fee-based or fee-only financial advisor sworn to act as a fiduciary (acting in your best financial interests, not theirs), preferably with experience managing significant wealth
- A certified public accountant who helps wealthy families organize their finances and guide you through what’s likely to be a very complicated annual tax preparation process
If you feel uncomfortable about any advice you receive, get a second opinion, even if you have to pay by the hour for the professionals’ time. You can afford it now.
Pro tip: If you’re hiring a financial advisor to guide you through the important decisions you’re going to have, check out SmartAsset. Answer a few questions to see a list of three vetted advisors in your area.
5. Change Your Address & Go Unlisted
Once you claim your prize, you won’t be able to avoid folks with their hands out. You’re going to hear from people you haven’t thought of in years — distant cousins, long-lost friends, college roommates, and even co-workers from five jobs previous — not to mention investment advisers and lawyers of questionable ethical mooring.
Though it won’t prevent the deluge, taking steps to lower your profile will make it a bit more manageable. You should:
- Immediately change all phone numbers associated with your immediate family to new unlisted numbers. While your old phone number will still be visible online, it won’t work any longer.
- Completely delisting your address is difficult due to the vast number of websites with publicly available contact information for United States residents. But you can make it more difficult to turn up in a casual search by switching your primary address for all correspondence (including bills) to a post office box.
- Change your email address and deactivate (and preferably delete) your social media accounts.
Should You Take a Lump-Sum or Annual Payout?
Before officially claiming your prize, you must decide how you want to receive it. You have two choices: a single lump sum payable all at once or an annual payment (annuity) that’s typically spread out over 20 to 30 years.
Technically, you don’t have to make this decision before claiming your prize, but doing so almost certainly assists with early wealth management and tax-planning decisions. And while it might seem obvious that the annuity option is a better bet, the calculation isn’t quite that simple. Carefully consider the pros and cons of each option before making a decision.
Taking the Lump-Sum Payout
When you take a lump-sum payout, you don’t receive the advertised jackpot amount, which assumes the winner takes the annuity option. Instead, you receive the current cash value of the jackpot, which can vary significantly but generally adds up to about half the advertised prize (sometimes a bit more). Use AfterLotto’s payout calculator to calculate state-specific lump-sum and annuity payouts after taxes.
Pros of a Lump-Sum Payout
Is the lump sum a bad deal? Not necessarily. The advantages of taking a lump sum include:
- Taking Advantage of Compound Interest. If invested prudently, the miracle of compound interest could result in growth far exceeding the difference between the lump sum and cumulative annuity payouts by the annuity’s scheduled expiration date (though that’s far from guaranteed).
- Locking in Current Tax Rates. The IRS taxes a lump-sum payment at present tax rates. If you expect income tax rates to rise in the future, choosing the lump sum protects you from paying higher taxes later. However, if tax rates remain the same, your overall tax bill could be higher with the lump sum than the annuity if taking the lump sum bumps you into a higher income tax bracket.
- Potentially Getting Access to More of Your Winnings. If you’re older or not in great health, there’s a significant chance you won’t live to see your last annuity payment. To virtually guarantee you get all the winnings to which you’re entitled before your death, choose the lump sum.
- Lowering Future Uncertainty and Risk. While lottery authorities are generally quite financially secure, there’s no guarantee yours will remain solvent until the end of any annuity period.
Cons of a Lump-Sum Payout
As rosy as all the pros make it sound, the lump-sum option isn’t without its cons. The drawbacks of taking a lump-sum payment include:
- Risk of Mismanagement. Poor investment decisions, whether your own or those of an incompetent or unethical financial advisor, could wipe out or significantly devalue your winnings. That’s less likely (though still possible) with an annuity since you won’t invest all your winnings at once and will therefore (at least in theory) have time to recognize your advisor isn’t acting in your best interests.
- Lower Payout Overall. You don’t receive the advertised jackpot when you choose a lump sum, and your net goes even lower after taxes. It’s still a lot of money — just not as much as it could be.
- Loss of Near-Guaranteed Income. An annuity offers the near-guarantee of long-term income. That’s an enticing prospect for anyone and could make the uncertainty of quitting your day job easier to bear.
Taking the Long-Term Payout
The annuity option spreads the full advertised amount of the jackpot over 20 to 30 years, depending on the sponsor’s policies. Payment size increases with time, meaning the last payment should be the largest. Actual payouts and payout ratios vary by the annuity’s timespan and the jackpot amount.
For example, according to AfterLotto’s payout calculator, a $200 million jackpot ticket purchased in Delaware would pay a total of $152 million after taxes on a 30-year annuity schedule:
- First Payment: $2,710,175.20
- 10th Payment: $3,857,424.08
- 20th Payment: $5,709,930.16
- Final Payment: $8,452,090.72
You can use AfterLotto’s calculator to estimate your own potential after-tax annuity payouts.
Pros of a Long-Term Payout
Taking the annuity may present multiple financial benefits. Its advantages include:
- Long-Term Cash Flow. Your annual payment provides near-guaranteed cash flow over a multi-decade span, transforming your finances and helping you build wealth for your heirs.
- Potential for Lower Taxes. Depending on the absolute size of your payout and income tax rates in your home state (if any), taking an annuity could land you in a lower marginal income tax bracket than the lump sum. That means you’ll pay less in taxes over the payout period — if not in absolute terms, due to the higher cumulative payout, then certainly in percentage terms.
- Checks on Overspending. Taking the annuity makes it impossible to blow through your entire prize in a matter of months or a few years. It’s certainly still possible to mismanage an annuity, but literally going broke takes much longer. As a result, it’s easier to maintain a comfortable (if not lavish) standard of living on a firm budget when you take the annuity.
Cons of a Long-Term Payout
As with most things, the long-term payout option isn’t perfect. The major downsides of accepting an annuity include:
- Exposure to Inflation. Because lottery annuities are not typically adjusted for inflation, their value declines slightly each year absent rare periods of deflation.
- Issues Related to Your Death. Though policies vary by state, you’ll likely be permitted to name just one beneficiary for your lottery annuity. That could be a big problem if you have multiple children or heirs who’d typically receive an equitable share of your assets.
- Risk of Insolvency. Unlikely though it may be, it’s theoretically possible for the lottery responsible for paying your annuity to go belly-up without a successor in place, leaving you in the lurch for any payments yet to be distributed.
- No Way to Claim Winnings Ahead of Time. Once you choose to accept your payments as an annuity, you’re stuck with it. In the event of a costly emergency, such as an extended hospital stay not covered by insurance, you might come to regret your choice. The same goes for nonemergency situations like long-term care.
What to Do After Claiming Your Prize
After claiming your prize and choosing your payout method, you’re ready to execute the plan you’ve hopefully put in place. What that looks like depends on all the plans you’ve made, but it generally involves the same basic steps for everyone.
1. Consult With the Professionals You Hired
These professionals exist to help you, not the other way around. Expect them to do their jobs capably — and if you find you don’t trust them, hire new people. Life-changing wealth is scary for those not accustomed to it, so it’s vital you have a qualified, ethical team helping you reach informed financial decisions.
2. Pay Off Most Debts
Leftover student loans, a second mortgage, credit cards, auto loans, personal loans — it doesn’t really matter. Now that you’re a lottery winner, you have no excuse not to pay off your debts, prioritizing the highest-interest debts if you’re able.
There’s one big exception to this rule. If your primary home’s mortgage has a low interest rate or you decide to upgrade to a nicer house with a bigger mortgage, keep paying it. The wealthier you are, the higher your income tax bracket, and the more you stand to save by itemizing your tax deductions, including mortgage interest (a big deductible expense for most taxpayers who itemize).
3. Start an Emergency Fund
Even millionaires run into financial problems. Setting up a healthy emergency fund or adding to an existing one is one of the first things you should do with your winnings. A good rule of thumb is to set aside enough to pay for six months of expenses, bearing in mind your expenses will likely increase as your standard of living does (a phenomenon known as lifestyle inflation). Choose a high-yield savings account with an institution that’s a Federal Deposit Insurance Corporation member, such as CIT Bank or Chime.
4. Put Away Money for Retirement
Next, allocate a percentage of your winnings to tax-advantaged retirement accounts. If you don’t already have a traditional individual retirement account (IRA), open one through a low-cost robo-advisor like Betterment or self-directed online stock broker like You Invest by J.P. Morgan. If you’re on an annuity plan, set up an annual contribution for the legal maximum. (IRS rules prohibit Roth IRA contributions for higher-income individuals, so a hefty lottery annuity will likely disqualify you from contributing to that particular type of account.)
5. Diversify Your Investments
If you don’t have a taxable brokerage account set up, open one at your earliest convenience and stock it with tax-advantaged alternative investments, like municipal bonds. You can even invest in nontraditional assets like fine art (Masterworks sells fractional shares), wine through a company like Vinovest, and cryptocurrencies. But be sure to discuss the potential risks with your investment advisor.
6. Set Up College Funds
If you have school-age kids or want to provide potentially life-changing education aid for someone else’s kids, set up a 529 college savings plan (which may come with state income tax benefits) or Coverdell ESA and make the maximum annual contribution each year. Connect your 529 plan to your CollegeBacker account to encourage friends and family members to chip in too.
7. Give to Those Less Fortunate
Whether it’s to a church, a charity, or just a family member facing hard times, consider sharing some of your good fortune. When you give to a qualified charity and itemize your income tax deductions, your donations could have tax benefits as well.
8. Learn to Say No
Once word gets out you’ve struck the jackpot, you’re going to get a lot of requests for financial help. Some will be legitimate and compelling — others, not so much. Unfortunately, until you’ve taken care of everything else on this to-do list, you should decline all but the most urgent. Otherwise, other people could drain your winnings before you realize what happened.
It won’t be easy. It’s virtually guaranteed that some people will do whatever they can to get you to part with your money: manipulating, pressuring, even threatening you to get their way. Come up with a ready-made excuse to parry these requests, such as needing to discuss all financial decisions with your spouse or financial advisor.
Playing the lottery is easier than ever these days thanks to platforms like theLotter, an international clearinghouse for lottery tickets in the U.S. and beyond. But that doesn’t mean winning the lottery is likely. The Powerball lottery’s odds exceed 1 in 200 million, for example. You’re many, many times likelier to be struck by lightning, according to the National Weather Service.
Still, it could happen, and if it does, you want to be prepared.
Do you hope to win the lottery one day? What would you do with your winnings?