From time to time, the news runs stories of lottery winners who blew through their windfalls quickly and ended up with nothing to show for their good fortune. If you are lucky enough to win the lottery, you need to take steps to ensure this sad scenario does not happen to you. Investing your winnings smartly can allow you to live comfortably off the proceeds for the rest of your life, while making the wrong moves could leave you hoping for another lottery miracle.
Calculate the amount of annual income your windfall can provide if invested conservatively. It takes a surprisingly large nest egg to provide a comfortable middle-class lifestyle on interest alone. Even $1 million provides only $40,000 per year, assuming a 4 percent return. Taking 4 percent of the portfolio as income is the best way to ensure the money will last—taking more than that amount could leave you at risk of running out of money.
Take a small portion of your winnings and buy a few things you have always wanted. It is normal to want to splurge after a big windfall, and failing to do so could leave you feeling deprived, which could in turn tempt you later on.
Divide your money into two parts—one part that is invested conservatively, in safe but low-yielding vehicles like bank CDs and government bonds. The other half of the money can be invested in the stock market, where the risk is higher but the potential returns are higher as well.
Contact your bank for information on CD yields and government bonds. Keep in mind that the current limit for FDIC insurance is $250,000, so you might need to use more than one bank if you have a lot of money to invest.
Create a ladder of CDs by dividing your money between one-, two-, three-, four- and five-year CDs. This staggers the maturity dates and increases the likelihood that your CDs will mature at higher rates.
Contact a low-cost mutual fund family and ask for a prospectus on its index funds. An index fund purchases all the stocks in a given index, often the Standard & Poor's 500. These funds have lower expenses, and they tend to do better over the long run than more costly managed funds.
Review the prospectus carefully for information about risks, fees and expenses. Keep in mind that large investors often have access to a special class of funds with lower expenses, as well as additional perks like investment advice and a personal investment counselor.
Complete the application and send the form, along with your check or wire transfer, to the address listed on the form. Depending on the fund family you might be able to complete the application and the money transfer online.
Decide whether you want the dividends and capital gains reinvested or deposited to your bank account. If you plan to live off the proceeds of your lottery winnings, having the capital gains, interest and dividends sent right to your bank account can be a good idea.
- Cash image by Greg Carpenter from Fotolia.com