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 in the future. 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 know for a fact that I didn’t break even over the course of my employment.
That was okay 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 coworkers did; horrible excuses, but here we are.
Even though I’ve never really dreamed of winning the lottery, as many do, I’d be dishonest if I said I never gave thought to 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. Every year, it seems, 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 the moment when everything started to go wrong.” But with careful preparation and the right mindset, no one has to. Read on for more detail on 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 that 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 your identity, reach out to trustworthy professionals who’ll 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 that you’re its rightful owner, you’ll be right back where you started. At minimum, make paper and digital copies of the ticket, preferably in two places: an encrypted cloud storage account and an external drive. Consider investing in a home lockbox or safe, or storing 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.
This is important 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, though you’ll want to check the issuing authority’s rules to confirm that you have as much time as assumed.
3. Don’t Quit Your Job or Spread News of Your Good Fortune
Tempting as the prospect might be, the period between the realization that you’re holding a winning lottery ticket and the day you step up to claim your prize is not the right time to quit your job.
In fact, you shouldn’t tell anyone other than your immediate family about your good fortune, least of all your coworkers. The last thing you need is for your boss to begin looking for your replacement on the assumption that 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 three 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
- An family law or estate planning attorney who specializes in customizing wills, trusts, prenuptial agreements, and other estate planning documents
- 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 CPA who helps wealthy families organize their finances and quarterback 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’ve considered hiring a financial advisor to guide you through the important decision you’re going to have, check out SmartAsset. Answer a few questions, and they’ll provide you with three vetted advisors in your area.
5. Change Your Address and 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, coworkers from five jobs previous, and on and on – 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 more difficult these days due to the vast number of websites with publicly available contact information for U.S. 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.
- Changing your email address and deactivating (and preferably deleting) your social media accounts.
Should You Take a Lump Sum or Annual Payment?
Before officially claiming your prize, you need to decide how you want to receive them. 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 will almost certainly assist 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. You’ll want to carefully consider the pros and cons of each option before making a decision.
Taking the Lump Sum Payment
When you take a lump sum payout, you won’t actually receive the advertised jackpot amount, which assumes the winner takes the annuity option. Instead, you’ll receive the current cash value of the jackpot, which can vary significantly but generally adds up to about half the advertised jackpot.
So, 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 this is far from guaranteed).
- Locking in Current Tax Rates. A lump sum payment is taxed at present tax rates. If you expect income tax rates to rise in the future, you might want to choose the lump sum.
- You Won’t Die Before The Annuity Expires. If you want to guarantee that you get all the winnings to which you’re entitled before your death, choose the lump sum.
- Less Future Uncertainty and Risk. While lottery authorities are generally quite financially secure, there’s no guarantee that yours will remain solvent until the end of any annuity period.
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 greatly devalue your winnings. This is less likely (though still possible) with an annuity, since you’ll theoretically have time to recognize what’s happening.
- Lower Payout Overall. As noted, you won’t receive the advertised jackpot when you choose a lump sum, and your net will be 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. This is 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 a period of 20 to 30 years, depending on the sponsor’s policies. 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 corollary, it’s easier to maintain a comfortable (if not lavish) standard of living on a firm budget when you take the annuity.
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 Premature Death. Though policies vary by state, it’s likely that you’ll be permitted to name just one beneficiary for your lottery annuity. This could be a big problem if you have multiple children or heirs who’d normally 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. 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. That means consulting regularly with the professionals you’ve hired to manage your windfall, paying off any outstanding debts other than the mortgage on your primary residence, invest your money responsibly and in accordance with your long-term objectives, and create a framework for multigenerational financial security.
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 that you don’t trust them, hire new people. Life-changing wealth is scary for those not accustomed to it, so it’s vital that 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. Set up a healthy-sized emergency fund or adding to an existing emergency fund 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 that your expenses will likely increase as your standard of living does (a phenomenon known as lifestyle inflation). Choose a high-yield savings account with a member-FDIC institution; CIT Bank is a fine choice.
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 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. Consider investing in nontraditional assets like fine art (Masterworks sells fractional shares), wine, and cryptocurrencies, but be sure to discuss the potential risks with your investment advisor.
6. Setup 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 to 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 the cat is out of the bag that 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, your winnings could be drained before you realize what happened.
This won’t be easy. It’s virtually certain that some supplicants 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’ll want to be prepared.
Do you hope to win the lottery one day? What would you do with your winnings?