How to Stay Rich After Winning the Lottery

1:02 PM, Jun 6, 2013   |    comments
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by Matt Krantz, USA TODAY

If the winner of the $590.5 million Florida Powerball lottery thought the odds of winning were tiny, the chances of holding onto the money might be even lower.

Anecdotal and academic research show lottery winners often wind up blowing their winnings and end up in a similar financial situation, had they not won the money. The poor track records of lottery winners, or others who come into large amounts of wealth very quickly, is more proof that holding onto money, can indeed be as tricky as winning it.

"It's pretty well documented that a meaningful number of lottery winners have a bad financial outcome," says Alan Skrainka of Cornerstone Wealth Management. "Before you know it, it's gone."

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There's no question one could have a heck of a time spending down $590.5 million. Assuming a 25% tax rate, that would leave the winner with $442.9 million after federal taxes. That amount of money could fill a garage with roughly 885 Rolls-Royce cars or about 44,290 Rolex watches. But that's exactly the kind of excess that gets lottery winners into trouble. Instead, lottery winners are advised to follow five tips, including:

  • Pay off debt. The most financially distressed players to win the lottery were sitting on $49,000 in unsecured debts at the time that they won, according to a study of Florida Lottery winners co-authored by Mark Hoekstra, professor of economics at Texas A&M. Shockingly, many of the winners who wound up in bankruptcy had little to nothing to show for the fact they they won, Hoekstra says. Even winners of large sums of money, between $50,000 and $150,000, had little to nothing to show for their windfall at the time of bankruptcy, Hoekstra says.
  • Get professional help. Lottery winners often have no idea how to manage that kind of windfall, Skrainka says. They often overestimate how long the money will last and overspend their cash or make poor decisions. It's important for winners, especially those without experience managing wealth, to team up with someone who does, Skrainka says. "Get professional advice from someone you can trust. Go to a successful person you know, and ask for a referral," he says.
  • Avoid getting fancy. Many suddenly wealthy individuals often think high rollers such as themselves don't need to put money into mutual funds from traditional companies. These investors often seek out obscure or custom investment vehicles from boutique investment advisers, hedge funds or they even made big bets on unproven businesses, Skrainka says. But that $100 million investment in your long-lost relative's promising wind farm probably isn't as prudent as the mutual fund from a trusted firm.
  • Fix bad money habits first. Winning the lottery doesn't undo a lifetime of bad habits when it comes to money, it just magnifies the size of the ultimate losses, Hoekstra says. Research has shown that even those lottery winners of large sums, more than $50,000, have comparable odds of filing for bankruptcy as smaller winners in five years. It's just that it take a bit longer for the winners of large sums to fall into financial ruin, Hoekstra says. "All the extra money did was postpone bankruptcy," he says. Hoekstra's advice? Fix your bad financial habits before you start dealing with your new-found riches. "If you're the kind of person who gets into financial trouble, you want to deal with whatever gets you into financial trouble and not expect those issues to go away (because you won)," Hoekstra says.
  • Make keeping the money the goal. If you won nearly $600 million in the lottery, you should be set for life, period, Skrainka says. Don't chase after aggressive investment plans that promise 20% annual returns; that's too risky and a good way to lose a game that's been won. There's no reason to take a risk when you have that much money. Shoot for lower risk investments with the goal of just hanging onto your money, Skrainka says. "The number one goal is to keep your money. Don't screw it up."

Watch here as USA Today Money Reporter Matt Krantz explains how to stay rich when you win the lottery.

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