The last Powerball jackpot was recorded at more than $222 million, and in 2022 it has risen to $2.04 billion.
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You might think that with all this money, you can do whatever you want with it. But there are some best practices recommended by financial experts. Read on to find out what not to do after winning the Powerball lottery.
Retirement planning: Whether you’re planning for retirement, dealing with a major life event, or simply want to make smarter financial decisions, a financial advisor can provide the expertise and guidance you need. Here are some compelling reasons to consider a financial advisor, even if you’re not wealthy.
Don’t choose lump sum payment
First of all, you need to know how to claim your winnings.
You’ll be offered two options: a lump sum payment or installments over the next few years. Jennifer Kohlbacher, CPA and director of strategy at Mariner Wealth Advisors, says she highly recommends choosing the installment option.
“If they choose to take a lump sum, winners typically take a permanent cut of 30% or more of the net present value and pay 100% of the tax in the first year,” Kohlbacher continued. “If they choose to pay in installments, winners often receive the full ‘advertised’ amount of the prize.”
“Furthermore, depending on the circumstances, when previously modelled for income tax purposes, installment payment options have typically reduced winners’ tax rates below the top tax rate.”
Kohlbacher said some winners take their prize in a lump sum out of concern about what will happen to it if something happens to them, but there’s no need to worry. “The installment payment options are usually backed by something like a laddered bond portfolio,” she added.
Don’t spend too much money on big purchases
“It’s natural to want to splurge on luxury items right after a big win, but impulse buying can quickly lead to financial problems,” says Yannis Zoulumpanos, financial advisor and senior contributor at Bountii.
Zulumpanos said it’s best to have the money in hand and take some time to evaluate what you need and what you don’t.
“Take the time to plan and make thoughtful decisions about your newfound wealth,” he says. “This approach will help ensure that your money lasts and grows over time.”
Find out: If you invested $1,000 in Ford stock 10 years ago, how much would you have now?
Don’t put all your money in one account
It may be tempting to keep all your cash in one place to make things easier, but experts warn against such a plan.
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“Don’t put all your money in one account,” says Stephen Bosworth, managing director at Bosworth Financial Group.
“Instead, hire an estate lawyer and a financial professional to help you diversify your portfolio so you can plan your financial future for life and have peace of mind.”
Don’t chase returns
Paul Gabrail, founder and host of Everything Money, said: “This may sound odd coming from a financial expert known for investment advice and value investing, but it’s true. It’s common for people who come into a lot of money (like lottery winners) to want to make even more money. That’s what chasing returns is all about.”
Investor and entrepreneur Shanka Jayasinghe agreed, warning people who have suddenly become wealthy to stay away from private equity investments.
“Over the past decade, private equity (which includes venture capital and other private market investments) has outperformed other asset classes when it comes to top-tier investments,” Jayasinghe continued. “So Powerball winners can be confident that this is a great investment.”
Jayasinghe warned that this could be a terrible decision as private equity is the least liquid asset class you can invest in and in most cases your capital is locked up for up to 10 years. Jayasinghe said that while you can invest in private equity, you shouldn’t put your entire portfolio in private equity.
“A more balanced portfolio allocation would consist of fixed-duration bonds and/or an index fund (such as VOO) that invests in the S&P 500. Private equity should be a small allocation that can increase to 40% or more of the portfolio once you become more familiar with its trends.”
According to Gabrail, it’s better to stick with proven methods.
“Stick to reliable, and for some people, “boring,” investments that allow you to live off the dividends and interest without touching your principal,” Gabrail says. “It’s unlikely you’ll run out of money, so this is a good way to protect your peace of mind.”
Speak to a financial advisor to help you decide which investments are the wisest and which are just a fad.
Don’t forget taxes
The money you win will cost the US government and your state.
“Although many lottery programs automatically withhold taxes, don’t expect them to be completely tax-free,” says Charlie Pastor, CFP and contributing expert to The Ascent.
“Your winnings could put you in the highest tax bracket and result in a large IRS bill,” he continued, “and if you live in a state or locality that taxes lottery winnings, be sure to have enough cash on hand to cover that bill as well.”
Don’t lend money
It might sound harsh, but Gabrail recommends not lending or borrowing money from friends and family for three months.
“If you win the Powerball, you have to realize that the money is just going to keep growing,” he says. “You’d be surprised how many people are going to knock on your door.”
Instead, Gabrail recommends spending those few months thinking about your priorities and where you can best put your money to good use.
“Make sure you create a budget and work with a financial professional to come up with a plan,” he added.
Don’t neglect charity
Bosworth said if someone is fortunate enough to win such a large amount of money, it’s important to distribute the wealth to organizations that need it.
“Don’t keep all the money you earn for yourself,” he said, “instead, donate some of it to multiple charities, because more money can mean more problems. (Plus) donating some of your winnings to help people in need can give you a sense of fulfillment.”
Don’t forget to experience life
Gabrail said that while the list of things not to do is long, people should also be allowed to have fun.
“Remember to invest in your life and the experiences you have,” Gabrail says. “When you become rich, it’s easy to get obsessed with the ‘stuff’ you can buy.
“Sure, buying a handbag or a car is fun, but spending your money on experiences you can enjoy with your loved ones will pay off big time.”
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This article originally appeared on GOBankingRates.com: 8 Things You Shouldn’t Do with Your Money If You Win the Powerball
