As you are reading this, the lucky person (or group) holding the single winning Powerball ticket is probably jumping up and down and dreaming big. One ticket matched all the numbers in the drawing on Wednesday night, Aug. 23, for the $758.7 million grand prize, the second-largest in history. The lump sum payout is estimated at about $480 million, according to CNN.
But newfound wealth — if not managed carefully — can quickly turn into a nightmare. In addition to immediately getting swamped with requests from family and friends, the money itself can be overwhelming. If you fail to plan well, the money can vanish as quickly as it appears. A study in Florida found that bankruptcy rates were actually higher among lottery winners than among non-lottery winners. There are countless stories of regular working Americans becoming overnight millionaires … only to have to return to work a few years later after blowing through it all.
Should you be that lucky person that walks away with the lottery prize, let me offer you a little advice.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
First, take a few weeks, blow a little money on frivolous things you’ve always wanted, and have a little fun. You might as well. But once you’ve gotten that initial splurge out of your system, it’s time to get serious about your money.
When you’re suddenly worth tens of millions of dollars — let alone hundreds of millions — you are no longer managing for a single lifetime. At that point, you are managing a mutigenerational fortune, and your needs are closer to that of an endowment fund or foundation.
So, what does that mean in practice?
Endowments are required to pay out 5% of their assets every year. As an individual, you’re not required to do that. But I’d say that 3%-5% distributions per year is a more than reasonable rate. If you take the lump sum for the Powerball jackpot (as most people do) of about $480 million, that would be an annual income of $14 million to $24 million per year. If you can’t live on that, you clearly need to prioritize.
Secondly, you’ll probably want to make donations to charities or to causes you support. On this count, you need to remember that you’re wealthy now, so your charitable contributions are going to look a little different than they did before.
Wealthy people don’t just write big checks. They form organizations like foundations that will, ideally, continue to make the world a better place long after the original patron has passed. Consider the case of Bill Gates and Warren Buffett. Rather than write checks to every cause they support, both gentlemen donated much of their respective fortunes to the Bill and Melinda Gates Foundation.
Long after Gates and Buffett are dead, the Gates Foundation will still be supporting growth and development in Africa and other developing parts of the world.
Now put yourself in their shoes. This isn’t just good for the charities you hope to support. It’s also good for you, in that you can get a large tax break today while doling out the funds over time.
And finally, let’s talk investments. At this level of wealth, virtually nothing you think you know about financial planning still applies. The uber-wealthy do not buy mutual funds or build 60/40 portfolios of stocks and bonds. Their portfolios often look a lot more like what you see at the Harvard or Yale endowment funds. And what does that actually mean? Harvard’s endowment only has 33% of its funds in stocks. It has another 18% in private equity and 12% in real estate. The rest is spread across everything from timberland to absolute returns hedge funds.
This doesn’t mean that you should copy Harvard’s asset allocation verbatim. But you should definitely have a similar mindset. Focus on absolute-return strategies rather than on “beating the market.” Earning a safe 7%-10% per year is preferable to the wild swings you’re going to experience in a stock-heavy portfolio.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
-
The Most Tax-Friendly State for Retirement in 2025: Here It IsRetirement Tax How do you retire ‘tax-free’? This state doesn’t tax retirement income, has a low median property tax bill, and even offers savings on gas. Are you ready for a move?
-
Plan for Higher Health Care Costs in 2026: Projected Medicare Part B and Part D PremiumsIn 2026, Medicare participants will pay more for their health care. Part B costs are expected to rise more than 10%. Here's what you can do.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
Five Questions to Help Ensure a Happy, Secure RetirementYou need to drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting ByLearning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the NumbersGuaranteed lifetime income sounds great, but how much will it be? Several factors determine your future payout on indexed annuities with an income rider.
-
Financial Fact vs Fiction: Why Inflation Is Lower, But Prices Are NotDo you think bonds protect you from stock losses? Are you confident your assets will go to your intended heirs if all you have is a will? Think again — and read on for other myths that could be leading you astray.
