This content is made possible by our sponsor; the views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Mavis Wanczyk, the single winner of the $758.7-million Powerball jackpot, plans to quit her job and relax. She should also consider a financial plan.
While it may be hard to squander $443 million—the estimated Powerball payout after taxes—there are plenty of cautionary tales of heirs, NFL players and lottery winners who lost their fortunes because of poor money habits. An oft-cited statistic (admittedly of apocryphal origin) suggests that seven out of 10 people will lose their windfall within a few years.
“It seems like the bigger the windfall, the greater the potential for a financial disaster,” says Jane Nowak of Wealth & Pension Services Group in Atlanta. Given that almost two-thirds of Americans have low financial literacy—according to the FINRA Investor Education Foundation—there's probably an elevated risk of financial mismanagement that goes with coming into a huge sum of money.
These steps can help you avoid having financial good fortune become a problem in your life.
It may seem almost automatic to share your good luck on Instagram or Facebook. Avoid the impulse, unless you’re interested in entertaining wild investment opportunities or sob stories for handouts.
For lottery winners, this can be more complicated. Only six states—Delaware, Kansas, Maryland, North Dakota, Ohio and South Carolina—allow winners to remain anonymous. However, in Colorado, Connecticut, Massachusetts and Vermont you can set up a trust or LLC to collect the winnings, which allows the disclosed winner to be an entity that isn’t publicly associated with anyone.
In the remaining states, you’re out of luck. So, instead, practice saying no. Alternatively, consider hiring someone to say no on your behalf, at least to the inevitable slew of strangers who will seek a share of your good luck.
After a windfall, you may want to make some big life changes. Leave your day job and start that business you’ve been dreaming about. Book a trip around the world. Or, move on up to a bigger house in a nicer neighborhood.
Don’t do any of those, says Joyce Streithorst of Frisch Financial. “Take some time to reflect on what is most important to you,” she says. Once you know that, you can develop a strategy that incorporates those priorities and ensures you won’t run out of money in the future.
People who receive more modest sums than Wanczyk may be tempted to buy what they couldn’t afford before. Soon, one small purchase turns into dozens of big expensive ones and the windfall is gone. Take David Haas’ friend who spent his large severance package on a four-star summer trip to Europe with his daughter. They had a great time, Haas, the owner of Cereus Financial Advisors, said. But his friend had a hard time finding another job and eventually spent both his severance and retirement savings and maxed out his credit card. “He dug a hole he may never fully recover from,” Haas says. Know your limits, even if you’ve become richer.
Don’t touch Uncle Sam’s money
There is no income tax on awards you receive from lawsuits, and inheritances and taxes are withheld before you collect bonuses from work, lottery winnings, and casino winnings. Still, any windfall you receive could bump you into a higher tax bracket. That means you may owe more income tax than ever before. Set that money aside in a savings account, CD or bond that matures at tax time, says Leon LaBrecque of LJPR Financial Advisors.
Make a plan
If your windfall is big enough, it could sustain you for your lifetime with careful preparation. Figure out how much you want to leave untouched and how much you need to live on every year. That will help you determine your annual withdrawal rate. Then don’t touch the principal, says LaBrecque, and invest in a balanced portfolio. After taxes and income, decide what expenses you will have—car, vacation, house—and set this cash aside in bonds that come due when you need them. Then, and only then, turn to helping family, charities or yourself.
You want to preserve and protect your windfall, rather than taking on unnecessary risk. Paying down debt first is a good idea, because your return is not paying interest. Otherwise, stick with unsexy investments in assets that historically appreciate and steer clear of unsound business ventures and investment opportunities. “(We) had one heir who put all of his $100,000 inheritance in[to] rare birds,” says David Demming of Demming Financial, “only to have them all die of bird flu within the quarter. And that was in 1980 dollars.” Don’t be that guy.
Get a pro team
To help you sort out your newfound fortune, seek an experienced attorney, financial planner and tax expert. They can also serve as a buffer from people in your life requesting money. “You can always say that your financial advisor told you that you can't touch the money right away,” says Haas. To avoid the sketchy professionals interested only in your money, have them to sign a fiduciary pledge, meaning they must act in your financial best interest at all times.
This content originally appeared on ValuePenguin.