If you've won a big-ticket payout in a lottery you are beyond "saving." You need some serious financial advice. Be reassured, however, that if your first thought upon winning the lottery is how to save the money, you're not likely to spend yourself broke anytime soon. Here's a primer on how you can get started on your new and prosperous future.
Quick! Hide and Do Nothing
A windfall fortune is a fresh new problem if you're not used to handling large sums of money. To summarize the sage advice of a zillion financial experts, you should do two things above all. First, stay anonymous to avoid an onslaught of craven entrepreneurs, grifters and spirit-killing requests for handouts. Second, do nothing until you find financial professionals who rank high for smarts and integrity, and get advice from them. You may need a certified financial planner, a certified public accountant, a tax lawyer, and possibly an insurance adviser. Look for people who understand your philosophy of spending and saving.
Hire a Clue, Especially if You're Clueless
Give yourself six months to a year to build a financial team, recommends Kiplinger Magazine. But check your lottery's Web site for details about the timeline. You may have less than six months to make your first decision: Whether to take the money in a lump sum or in an annuity. Lottery payouts are typically set up as annuities, which means the payments are in equal dollar amounts that you get each year for one to three decades.
Choose an Annuity or a Lump Sum
The lottery company pays annuities to winners because it makes the lottery winnings seem bigger. An annuity costs the lottery company less than paying the full dollar amount at once because of inflation. That is, a dollar twenty years from now won't buy as much as it does now. The effect of inflation over time is also called the time value of money. If you take a lump sum, the lottery company won't give you the full $1,000,000, or whatever amount you won. Instead, they apply what's called a discount rate so the lump sum equals what you would get if you had chosen the annuity.
Short Term Savings
If a payout would bring your winning year's income to, say, the 28 percent federal tax bracket -- $180,000 to $200,000 depending on your marital and filling status -- you can park the money for a few months in a plain old savings account while you find investment advice. Even putting cash in a safe deposit box is better than throwing it into a complicated investment that you don't understand. Just don't hide it at home -- and don't park it for long.
Get Wise to Stay Wealthy
Be aware that in becoming a wealthy investor, you've gotten a new job as a student of personal finance. Subscribe to financial-management magazines such as Kiplinger, Worth, Wealth, the weekly newspaper Barron's, and others. Be prepared for meetings with your advisers so that you can discuss your money rather than simply take advice. Your financial team will likely recommend a combination of investments. They will include stocks, which are like little slices of companies. They'll include bonds, which are like "I owe you" notes from governments or businesses. They will also recommend other investments, such as commercial real estate.
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