Taking all your lotto jackpot winnings at once causes bigger problems than just a tax-induced headache, according to a personal finance expert.
The Mega Millions jackpot swelled to $1.02 billion after no one claimed the $830 million Tuesday draw. The jackpot has grown from a measly $20 million in April, making 29 consecutive draws without a winner.
Robert Pagliarini, financial adviser and author of ‘The Sudden Wealth Solution’, told FOX Business that most winners would want to take the lump sum up front even if they can only keep 60% of the total jackpot through taxes. – but that would be a mistake.
“Most people want to take the lump sum: they want their money upfront, even though they know they’re going to, you know, get 40% when they take the lump sum,” Pagliarini explained. “They want control, they want it now; they don’t want it stretching out for nearly 30 years.
“Very good: you can take this money, you can invest it…do what you want with it,” he continued. “The problem with the lump sum is…there’s a good chance people will basically spend the jackpot and run out of money, which we see time and time again…you make bad decisions and spend the money, there there’s no reset button, there’s no resume.”
According to Pagliarini, making payouts over 30 years has two major benefits: winners get paid in full (even if it’s over decades), but, more importantly, they learn from early mistakes that might come from “wealth sudden”.
These lessons can last up to six or seven years as the new rich learn to navigate the pitfalls of owning such wealth.
Pagliarini noted that taking the lump sum, if managed well, has its own benefit in that it provides a better return on investment: if a the investor can add 3% to 5% of value on their initial investment of that lump sum – about $650 million, in this case – it returns more money than annuity payments and investing much smaller sums.
But he thinks most people would be better off taking annuity payments over 30 years.
With so much money suddenly in their hands, people often make bad investments, like investing with people they know or in risky businesses such as restaurants, clubs and bars.
“It’s very, very difficult to be successful, and so especially if you mix these types of businesses with family… not only do you have a high chance of losing your investment, but, more than that, you’re probably having problems with the relationship with the people you’ve invested with,” Pagliarini said.
Instead, he suggested that the best thing to do is to make “simple and clear” investments, such as diversified portfolios and index funds, because the largest investments in hedge funds, limited partnerships , private equity and others are harder than people think.
More importantly, Pagliarini said winners must remember to “breathe.”
“There’s anxiety; there’s fear; there’s the feeling of, damn it, am I going to screw this up? Like I don’t know what I’m doing? You have these competing emotions of happiness, but also out of fear,” he said. . “These as a combination aren’t great when you have to make financial decisions and when you’ve won the lottery you have to start making financial decisions very, very quickly.
“I would say try to relax, try to breathe: don’t tell a lot of people,” Pagliarini added. “My rule is, tell a family member and quickly hire a lawyer who can guide you, who has your best interests at heart.”