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Jul 21, 2004, 9:24 am (10 comments)
Ever wonder what happens to folks who win the lottery? Or even more significantly, what happens to their money? A little digging into the lives of several winners turns up some surprising and disturbing answers. And it's clear hitting the lottery jackpot does not necessarily lead to happily ever after.
It was just 11 years ago that Suzanne Mullins won more than $4 million in the Virginia lottery. Today, she not only is broke, she's $154,000 in debt.
Hard to believe? Not for Tom Nasta. He's a personal financial planner in Roanoke. Tom says it's not unusual for people to go broke after winning the lottery. He had a client who won $1 million and within seven years, all he had left to show for it was a mobile home.
I guess we shouldn't be too surprised. Think of the number of movie stars, singers and professional athletes who've earned huge fortunes during their careers, yet end up penniless or worse, heavily in debt or bankrupt.
On the other hand, we hear quite often about the laborer, the factory worker and the clerical worker who never made more than a modest salary but who left thousands, sometimes millions in their estate simply because they'd lived frugally and invested wisely.
In the final analysis, it's not how much we make that determines wealth. It's how much we're able to keep.
Today's thought: It's a basic principle of accumulating wealth that how much we save is more important than how much we earn.
Detroit Free Press
I can see how it could happen. $1 million or $4 million is not an endless pile of money. First you pay taxes, then you buy a big house, a vacation house, expensive cars, give money to family and friends, take lots of expensive vacations, buy lots of crap you don't need just because you have the money, it adds up. The reason celebrities get into trouble is that they live like they are making $4 million a year each year when in fact the $4 million is a 1 year windfall, and if a couple of years go by without the millions it's hard to keep living it up. It's same for lottery winners.
I like to think my main indulgences if I had $4 million would be a modest new house and 1-2 months a year travelling.
Lottery winners become losers if they receive annuity payments.
No, they become losers because they cannot live within their means. If I was to get 35 thousand/25-28 thousand after taxes a year I would find some way to live within my means. To be honest, they are just plain stupid.
MP
I disagree. I think if you were getting (for example) $100,000 a year instead of a one time check for $1.5 million, you would be forced to think of the future more and be more likely to live within your means...and know that if you spend the money in 3 months it will be a long 9 months until the next check. It would help you realize the money needs to be thought about over time. It's true, you could run into trouble anyway, but I would think in your mind you would have some limits that wouldn't be there with a lump sum of found money burning to be spent. True story: I know a couple who won Mass Megabucks years ago for $3 mil, which I think works out to be about $100,000 a year after taxes over 20 years. The first year, they went on such a spending spree that they not only burned through the $100 k, but spent so much they had to borrow from friends to pay the rent for the last 3 months until the next check. Unpleasant situation, even if you can afford to pay things off with the next check. They learned their lesson, and never spent like that again. When they regained their fiscal sanity, they still had 19/20 of their winnings left. If they had had the entire amount available, I wonder how much they would have spent the first year - a lot more than 1/20 of their total winnings I would guess.
What does "Mort Crim" mean?
ok. the lottery winner in the article did recieve annuity payments, but she was able to get a LUMP SUM by selling the rights to the annuity. It was her option to go with the lump sum that made her in debt. Had she still gone with the annuity, she probably wouldn't be in debt too bad because she would still be recieving payments, and she would be able to pay her debt off. Annuity is better because if you make a bad investment, or you go on splurges, you haven't pissed away all of your winnings. In some cases, taking the annuity option is like working until the retirement age, except you're probably making more than what you would working, and you would not need to do any work for an employer.
I agree with MetroPlex.
To quote a very wise man, "Stupid is as Stupid does." Large amounts of money are far easier to manage than small amounts. After all, it's difficult to find extra money to pay unexpected bills, but it's very simple to leave extra money in the bank; you just don't spend it. If you can't live within your means, even after those means have increased a thousand-fold or more, well, then, I'm sorry but, you're a moron, and you should probably be slapped.
It's not easy for unskilled labor to make ends meet these days. Ten years ago, $10.00 an hour was pretty good money here in the midwest; now, it's barely a living wage. But living paycheck-to-paycheck will impair one's financial judgment over time, so if you're making $350.00 a week in March, and then you make $100k a year in April, that's still a paycheck, and it's your obligation, as a well-behaved member of the working poor, to consume your wealth as quickly as possible.
If my sarcasm is lost on you, I'm sincerely sorry. The simple fact is that most people never prepare themselves for sudden wealth and, worse, never bother to educate themselves on basic economic principles.
It would have made no difference whether these people chose annuity payments or cash; they would have blown the money either way. It wasn't the windfall that got them into trouble; it was their ignorance of how money works in a capitalistic society. Most working-class people can't see beyond next Friday's check, so when they win a jackpot, that mentality kicks in automatically. It's not their fault, really, because that behavior is ingrained as we grow up.
Living beyond our means is something we're taught to do from the time we're in high school. We want a car, so Dad says, "Okay, I'll give you the down payment and put you on my insurance policy, but you'll have to get a job to make the payments." Ah! Payments! I can make payments. And the smaller the payments, the more stuff I can afford! This is called leverage; it's committing money you haven't earned yet for future payment on a current obligation, which means that your financial strength has been reduced until that obligation has been met.
Want to buy a house? For a fee, your bank will help you leverage your remaining income like you never thought possible. It's a wonderful feeling when you realize you're $280,000.00 in debt, knowing you only earn $48,000.00 a year. Then, of course, you'll need a garage. And a boathouse - Oh, and a boat, too... you'll need a new boat if you have a boathouse. And a Jetski, and an ATV or two, and a big-screen TV and a home theatre system and, of course, new furniture, which doesn't match the drapes, so now you need new carpet and wallpaper, and while you're at it you might as well resurface the driveway, and build a guest house on the vacant lot in the back, if you can find the owner and talk him into selling on land contract...
Rich people use leverage, too, but they leverage their investments, not their consumptive lifestyles, and that's why they're rich.
The time to talk to a financial planner is now, my friends, before you win the big one. If you're an LP member, you're probably not a passive player who just buys an occasional quick-pick when you fill up with gas. You're a serious player who not only believes you can win, but you have every intention of doing so; you expect it. So, take some time now to educate yourself on high finance. Find a reputable firm and make an appointment. If you don't know any financial planners, ask your banker to steer you in the right direction. Don't be shy about telling him of your plans - bad decisions are borne of ignorance, so be up front and honest about why you're there. It might feel funny telling someone that you plan to win the lottery but, when you do win, believe me, they'll take you seriously from then on.
Armed with this new information and knowledge, you'll be able to make informed, intelligent decisions when dealing with the distribution and management of your new fortune.
Do it now. If you wait until after you win, it might not even occur to you to seek financial advice until it's too late (for example, after you meet the rest of your family - you know, the ones who discovered your relationship on the day following your jackpot win). Speaking with a financial planner doesn't cost anything, and it's cheap insurance against making what could turn out to be catastrophic financial decisions at the one time in your life when you can least afford to make them.
Good luck...
I prefer to think of it as becoming a winner 20, 25, or 26 years in a row.
Well, then, they blow their almost certainly only chance at becoming INSTANTLY wealthy.