How to Spend Your Lottery Winnings

There’s an estimated $1.4 billion at stake in tonight’s Powerball drawing, and it’s probable that one of my readers will be the winner*.

There’s a lot of wonderful information floating around the internet right now – whether you should take a lump sum or the annuity payout, how fast you should hire a tax advisor (answer: super fast), the best things to buy with your winnings (\”bunch of hookers and cocaine\” is a long shot to win that one…).

However, I haven’t seen any comprehensive plans on when and how to spend your money – just some bland generalities. That’s where I come in, because I think I’ve hit on the best plan ever for spending lottery winnings. Down to specific dollar amounts and exact timing, which is pretty amazing because I don’t even know how much a winner might net.

Are you ready?

The answer:

Don’t spend a penny of your winnings. Ever.

Some folks may be scratching their heads, because those hookers and cocaine won’t pay for themselves. What is the point of having a $500 million pile (my 10 second estimate of what someone might net tonight with the lump sum) if you’re just going to look at it?

But my spending plan is based on a number of things: the winner’s life probably isn’t a living hell right now, anticipation is greater than realization, and the most important thing for any lottery winner to do – even more important than hire a tax advisor – is to stamp on the brakes really hard. If you’ve made it this long without gold-plated toilets, you should be able to make it a little longer.

 

Why Is It a Great Idea to Never Spend Lottery Winnings?

1. It lowers the risk of you blowing it. You can’t spend all of your winnings if you don’t spend any of them, right?
2. You’d be forced – quickly – to understand how to invest, because you need income if you want to start spending and having fun.
3. Your investment choices (definitely guided by professionals) would initially favor producing regular income fast. You’d want things that put steady cash in your pocket this month or next, and that might keep you away from some of the riskiest ventures.
4. You’d slow down the pace of your spending madness, and perhaps avoid the dark fate of many lottery winners. Spending the income you produce, rather than the $500 million itself, would anchor you in a much less crazy pace and let you adjust a little more slowly to being super rich.

 

Let’s role-play this a bit. You get behind the wheel of your armored truck or whatever and start cruising around for ways to invest your $500 million.

Interest rates are still painfully low, but let’s say you decide to get a money market rate across a variety of banks with strong balance sheets (or find 2,000+ different banks so you have full FDIC insurance…). I’ll assume you could find a juicy .2% rate or so without too much problem.

That would give you a whopping annual income of $1 million to spend. You, Mr. or Ms. ½ billionaire, would be a rich person indeed!

I’m sure a $500 million Powerball winner would sniff at a chumpchange $1 million annual spend. It’d be a little hard to buy airplanes and chateaus and sports teams and stuff. Rules are rules, though, so to spend more than that, you’d need to produce it.

So then you’d be forced to start investing a little more broadly, and that’s where the beauty of my plan would come in. You’d want steady cash flow, which would hopefully keep you away from starting a rocket ship company or becoming an alpaca farmer. You’d be anchored on $1 million as your income-to-improve, and that’d be a good thing.

For example, what if you took $50 million of your pile and put it into a broad basket of short-term corporate bonds, paying, say, 2.5%. Your annual income (and spending money) would more than double. What if you took another $50 million and put it into a broad bundle of stocks paying a modest dividend (perhaps 2%). You’d have over $3 million of hat money each year without dipping into your capital, and your advisors could surely figure out ways to increase income from there.

The point is our hypothetical winner could get to $3 million of annual spend with little effort and modest portfolio risk, and does anyone (before winning the lottery) think they’d be miserable with that?

Why So Arbitrarily Conservative, Captain Buzzkill?

Many folks would say not spending any of your winnings is waaaaaay too conservative and is totally arbitrary.

I would agree. But you know what else is arbitrary? Winning the Powerball lottery at 1 to 292 million odds. With your payout a function of 1) how much money folks – most of whom really can’t afford to play – have decided to contribute, 2) how many times the jackpot has rolled over, and even 3) which state you’ve decided to live in.

Everything about winning the lottery is arbitrary, so what’s one more rule tacked on?

Happiness and money do not have a linear relationship. I’m pretty sure a person spending $30 million a year is not 10x happier than one spending $3 million, or 600 times happier than me. Once you get past a certain level, your happiness is going to be pretty independent of your spending, so why not set that spending where you have the best chance of never running out?

Lotteries Big and Small

Of course, the point of all this is not just to address the eventual Powerball winner. It’s to demonstrate how a philosophy that is (wait for it…) asset-based is the right approach to a windfall.

A lottery winner (or a professional athlete with a big contract, or someone receiving an inheritance, or you getting paid a bonus, or my son finding a $10 bill) hasn’t been handed a perpetual stream of cash to blow; they’ve been handed a one-time pile of assets. Preserving those assets is the key to turning them into income, and my “don’t spend any winnings” rule is just preservation to an extreme.

There is a slight chance that the eventual Powerball winner won’t heed my advice, but hopefully we can apply it in smaller matters as well.

If you are playing tonight, good luck! If you win, please let me know in the comments.

 

* As one of my professors used to say, “It’s probable, but not very likely.” The best jokes are statistics jokes, no?

 

Picture courtesy of Farrokh Bulsara