How does such a large windfall lead to financial ruin? And how can you make sure you invest lottery winnings wisely to set yourself up for long-term financial success?
Here’s how to invest lottery winnings.
Why So Many Lottery Winners Go Broke
As a lottery winner, you have a surprising number of factors working against you financially. Here are five reasons why lottery winners often blow through their winnings so quickly:
1. Simple lack of financial knowledge.
Financial education is severely lacking in schools, so many Americans simply don’t have the information about saving and investment strategies. If you’ve never had a lot of money, you can’t be expected to know what to do with it when you get it! Even those who make a good living struggle to figure out what to do with a windfall like this.
2. Pressure to give to friends and family.
Requests for loans, gifts, or handouts can spiral out of control, especially if boundaries aren’t set early. Even if family and friends aren’t pressuring you, you might feel pressured to pick up the tab for every dinner, spend more on their birthday gifts, or contribute generously to their kids’ fundraising efforts.
3. Overspending and lifestyle inflation.
It’s so tempting to rush out to buy a new house, cars, vacations, and gifts. And when you have a lot of money sitting in your bank account, it’s incredibly easy to start living beyond your sustainable means.
4. Bad investments and scams.
Newfound wealth attracts opportunists. Many lottery winners are targets for fraud or are convinced to fund risky ventures.
5. Quitting your job to live on your income without a long-term plan.
Without recurring income to replenish your spending, it won’t take long to blow through a lot of money. You might be surprised at how easy it is to spend even millions of dollars.
So, how can you minimize or even eliminate these risk factors entirely?
Here is a five-step plan to invest your lottery winnings wisely and avoid costly mistakes.
Step 1: Protect Yourself While You Plan to Collect
The moment you realize you’re a winner is overwhelming! There are a million thoughts running through your head in a million different directions. This is not the time for making life-changing decisions. Instead, simply secure the ticket for now by:
Confirming the numbers using the lottery’s mobile app or triple-checking the numbers on the website,
Signing the back of the ticket (for paper tickets) as indicated on the ticket,
Taking photos of the ticket, front and back (screen grabs of digital tickets), and
Storing the ticket in a safe place.
Now, find out how to cash in, including:
How soon you need to collect. Look for the expiration date on the ticket. In most cases, you have at least 90 days from the date of the drawing to collect. While you certainly don’t want to wait until the last minute and risk forfeiting your prize, you do want to give yourself time to collect your thoughts, contact some financial professionals, and figure out where the money will go initially.
Where you need to go. Larger prizes may require a physical trip to a local lottery office or designated claims center, which might require an appointment.
Whether you can remain anonymous. Currently, only 17 states allow lottery winners to remain anonymous. If this is an option in your state, it is highly recommended because it protects your identity. This can minimize financial requests from family, friends, and any opportunists looking to target winners.
Options for accepting your winnings. Most large jackpots can either be taken as a lump sum or over a series of payments for a period of years (often 20-30 years). The lump sum option is typically less than the advertised jackpot amount, so it is important to know the specific amount of the lump sum vs. the annuities. We’ll explain how to decide between the two options in Step 3.
If possible, it’s best to keep the news to yourself while you figure out a short-term game plan. The fewer people who know about the winnings, the fewer people you may have trying to get a piece for themselves.
Step 2: Assemble Your Financial Team
Because so few of us have experience dealing with a large windfall, it’s best to get expert advice from the professionals who deal with high-net-worth investing every day. They can help you establish LLCs or trusts to protect your new assets, advise on whether a lump sum or annuity would work better for you, and provide tax strategies to keep you from paying too much in taxes.
There are three specific positions you should fill:
1. A fiduciary financial advisor.
There are many financial advisors available, but you specifically want a fiduciary because fiduciaries are legally obligated to act in your best interest. Make sure the paperwork you sign with the advisor states that they are a fiduciary.
2. A CPA (Certified Public Accountant) who specializes in income tax.
A CPA can help you find income tax deductions when filing your taxes, but they can also advise on tax-saving investment strategies, like contributing to a tax-advantaged retirement account or investing in real estate for tax benefits.
3. An estate planning attorney.
Estate planning attorneys can help you create trusts or other entities to hold your wealth and pass it along to the next generation. These entities are important because they can limit your liability, protect your assets in the event of divorce (depending on the circumstances), and simplify the inheritance process.
Invest a little time in interviewing multiple people for each position. Only consider well-established experts with glowing reviews and professional credentials. Search online to make sure any licenses are in good standing and that there are no unresolved complaints with the Better Business Bureau or ongoing legal issues.
Step 3: Define Your Goals and Create a Plan
Start thinking about what you most want to accomplish with this money and how you want your life to look. Consider questions like:
Do you want to keep your job, change careers, or retire early?
Do you want to stay in your current home or relocate?
What kind of hobbies do you want to fund?
Do you want to start a foundation to support a cause that is important to you?
Write down your thoughts and discuss them with your fiduciary to get feedback on how you can invest your lottery winnings to meet your goals.
This is a good time to decide if it makes more sense to collect your prize as a lump sum or annuity. In general, the annuity is the better option for most winners. By spacing out your payments, you maximize the amount, receive a guaranteed annual income, and space out the tax burden (by paying taxes on each payment rather than upfront). However, it might make sense to take the lump sum if the annuity payments are likely to outlive you. Discuss your options with your fiduciary so you can plan your investment strategy accordingly.
This is also a good time to plan an indulgence. Making a conscientious decision to splurge on one major purchase could help prevent impulse buying later. A luxury vacation? A dream wedding? A new wardrobe? Build it into your budget and spend guilt-free!
Step 4: Collect Your Winnings and Build Your Financial Foundation
Rather than having your winnings transferred to your primary checking account, create a separate landing account for your funds. A high-yield savings account is typically a smart choice because it keeps your money liquid (easily accessible) while earning interest and being protected by FDIC insurance (up to $250,000 per depositor, per FDIC-insured bank, per ownership category).
Your financial advisor might also advise that some or all of the funds be directed straight into a trust or LLC for asset protection and/or tax purposes (if allowed in your state). If this is recommended, make sure you understand how this affects your access to your funds.
Before investing any of your new wealth, allocate some of the funds to giving yourself a solid financial foundation as follows:
Pay your taxes. Lottery winnings are taxable, so you should set aside funds to pay your estimated tax bill (ask your CPA for an estimate)
Establish an emergency fund. Having 3-6 months’ worth of living expenses in an accessible high-yield savings account can prevent you from resorting to high-interest credit cards to cover unexpected expenses in the future.
Pay down debt (if beneficial). High-interest debts (like credit cards, personal loans, and auto loans) should be paid down to reduce or eliminate your monthly payments while saving you money on interest expenses. If you have low-interest debt (like a home loan with an interest rate under 5%), it may not be worth paying down. As a general rule of thumb, if index funds are earning a higher rate of return than the interest rate on your debt, you’re better off investing rather than paying off the debt.
Step 5: Invest According to Your Goals
With your financial foundation in place, you’re ready to invest!
The Best Investment Options for Lottery Winners
Your specific investments will depend on the goals you established in Step 3, but here is a list of the best options.
Index Funds
Index funds are bundles of stocks and/or bonds that track a specific market index (like the S&P 500, for example). Instead of trying to beat the market, they aim to match its performance.
Why index funds are good for lottery winners:
Diversified risk. By investing in hundreds of companies at once, your risk is spread out.
Low cost. Index funds have lower fees compared to actively managed mutual funds.
Set-it-and-forget-it. Ideal if you want steady, long-term growth without constantly managing your portfolio.
Real estate syndication is a particularly attractive option for investors because it allows you to buy into a pre-vetted, professionally managed real estate deal. The deal could be anything you choose: a rental property, a house flip, or even a multi-family development! By joining other investors and the project’s sponsor, you can buy into high-value deals with comparatively low investment minimums. These low minimums also give you a chance to diversify by investing in multiple deals, rather than putting all your real estate capital into a single project.
Why real estate is a solid investment option for lottery winners:
Appreciation potential. Real estate tends to grow in value over time.
Passive income opportunities. Rental properties or REITs can generate monthly cash flow, which could provide enough income to live on when managed carefully.
Inflation hedge. Property values and rents often rise with inflation, protecting your wealth from eroding as prices increase.
Flexibility. With so many different ways to invest, you can add real estate to your portfolio on any budget and at any level of experience.
Precious Metals
Precious metals, like gold, silver, and copper, are physical commodities that hold intrinsic value and are often used to safely store wealth.
Why precious metals are good for lottery winners:
Wealth preservation. Metals retain value during economic instability or inflation.
Diversification. Helps balance a portfolio by not correlating directly with stocks or bonds.
Liquidity. While not as liquid as cash, metals can be sold relatively easily if needed.
Annuities
Annuities are insurance products that provide guaranteed payments over a set period or for life, typically in exchange for a lump-sum investment.
As mentioned, many lotteries offer winners the chance to annuitize their prize rather than take a lump sum. And this is often advisable. However, in some cases, it makes more sense to accept the lump sum and purchase your own private annuities, which offer more control, customization, and potential financial advantages compared to the lottery system.
For example, if your lottery does not offer the ability to pass payments to heirs beyond a certain point, you might prefer to take the lump sum and arrange your own annuity that would pass the benefit along to your spouse or heirs if the payment terms exceed your lifespan.
Why private annuities are good for lottery winners:
Lifetime income. Helps prevent overspending by turning a portion of winnings into a predictable stream of income.
Peace of mind. Offers financial security regardless of how the market performs.
Customization options. Options include fixed, variable, or inflation-adjusted payments depending on your needs. You can also name beneficiaries and implement measures that reduce your income tax liability.
529 College Savings Plans
529 plans are tax-advantaged investment accounts specifically designed to save money to cover education expenses. Establishing 529 plans for your children, grandchildren, nieces, nephews, or any other kids in your life can ensure that they have the means to get a good education to set themselves up for their own success.
Why 529 plans are good for lottery winners:
Tax savings. Earnings grow tax-free, and withdrawals for qualified education expenses are also tax-free.
Family planning. Great way to fund education for children, grandchildren, or even yourself.
Low risk. These plans often include age-based investment options that get more conservative over time to protect their returns from market downturns as the time to use the funds draws closer.
How to Invest Lottery Winnings in Real Estate Syndication
If you’ve decided that real estate syndication is the right investment for some of your lottery winnings, the real estate experts here at Gatsby Investment are excited to help you get started!
We have a well-established track record of successful deals with impressive double-digit returns for our investors. In fact, most of our investors are so happy with the results that they return to invest in project after project with us.
We take care of every detail of your investment from start to finish so you can focus on building your new life rather than just managing your money.
Welcome to the Gatsby AI assistant. I am here to answer your questions about investing, our investment products or other helpful information about our company.
