8 Things You Shouldn’t Do With Your Money If You Win the Powerball
The last Powerball Jackpot was recorded to be more than $222 million and got as high as $2.04 billion in 2022.
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With that kind of money, you might think you can go wild. But there are still some best practices that financial experts recommend. Read on to see what not to do after you win the Powerball lottery.
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Don’t Opt for the Lump Sum
First things first: know how to accept your winnings.
You’ll be given two options: lump sum and installment payments over the following years. Jennifer Kohlbacher, a certified public accountant (CPA) and the director of strategy at Mariner Wealth Advisors, said she strongly suggests going for the installment option.
“If a lump-sum is taken, the winners typically take a permanent net-present-value haircut of 30% or more and pay 100% of the tax in the first year,” Kohlbacher continued. “Many times, when the installment option is taken, the winner receives the full ‘advertised’ winnings.
“Additionally, depending on the situation, when we have modeled it out before for income tax purposes, the installment option usually kept the winner below the maximum tax bracket.”
Kohlbacher said that some winners take the lump sum because they’re worried about what goes on with the winnings if something happens to them, but there’s no reason to worry. “Typically, the installment option is backed by a laddered bond portfolio, etc.” she added.
Don’t Blow the Money on Big Purchases
“It’s natural to want to splurge on luxury items right after a big win, but impulsive spending can quickly lead to financial problems,” said Yiannis Zourmpanos, a financial advisor and senior contributor at Bountii.
Zourmpanos said it’s better to hold onto the money and give yourself a second to evaluate what you need and what you don’t.
“Take your time to plan and make thoughtful decisions about your newfound wealth,” he said. “This approach will help ensure your money lasts and grows over time.”
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Don’t Put All of the Money in One Account
You might be tempted to keep all the cash in one place to make things easier, but experts caution against this plan.
“Do not put all the money in one account,” said Steven Bosworth, the managing director at Bosworth Financial Group.
“Instead, hire an estate attorney and a financial professional to help you diversify your portfolio, so that you can have your finances mapped out for life and give yourself peace of mind.”
Don’t Chase Returns
Paul Gabrail, the founder and host at Everything Money, said, “This probably sounds odd coming from a financial expert known for investment advice and value investing, however, it’s true. It’s common for people who come into large amounts of money (like lottery winnings) to want to make even more money. That is chasing returns.”
Investor and entrepreneur, Shanka Jayasinha agreed, warning those with sudden wealth to stay away from private equity investments.
“Over the past ten years, private equity (including venture capital and all other private market investments) has outperformed other asset classes if you were to take top performers,” Jayasinha continued. “Therefore, a Powerball winner could believe that this is a great investment.”
He warned that this could be a terrible decision as private equity is also the least liquid asset class one could get into — most times seeing their capital locked up for up to 10 years. Jayasinha said you can still invest in private equity, but it shouldn’t be your entire portfolio.
“A more balanced portfolio allocation [would be] comprised of some fixed-term bonds and/or an index fund investing the S&P 500 (such as the VOO). Private Equity should represent a small allocation that grows up to 40%+ of their portfolio once they are more familiar with its dynamics.”
According to Gabrail, it’s better to go with the tried-and-true methods.
“Stick to reliable, and some may say ‘boring,’ investments that allow you to live off of the dividends and interest without having to touch the principal,” said Gabrail. “It is unlikely you would run out of money, so this is a good way to protect your peace.”
Consult a financial advisor to see which investments would be most prudent for you to make and which are just fads.
Don’t Forget About Taxes
The money that you win comes at a cost to Uncle Sam and your state.
“While many lottery programs automatically withhold for taxes, don’t expect to be totally in the clear,” said Charlie Pastor, a certified financial planner (CFP) and contributing expert at The Ascent.
“Your winnings could put you in the top tax bracket and leave you with a hefty IRS bill,” he continued. “And if you live in a state or territory that taxes lottery winnings, be sure to hold enough cash in reserve to cover that bill, too.”
Don’t Lend Out Money
This may sound harsh, but Gabrail suggests not letting friends or family borrow money for three months.
“If you win the Powerball, you must be aware that money magnifies,” he said. “You would be surprised how many people will be knocking on your door.”
Gabrail instead recommends spending those months thinking about your priorities and where your money would be best spent.
“Make sure to budget and work with a financial expert to put a plan in place,” he added.
Don’t Skip Out on Charities
If you are lucky enough to win such a large amount of money, Bosworth said it’s important to spread your wealth to organizations that need it.
“Do not keep all the earnings to yourself,” he said. “Instead, donate some money to multiple charities, because more money can sometimes come with more problems. [Moreover,] donating a portion of your winnings to help others in need can be fulfilling.”
Don’t Forget To Experience Life
Gabrail said even though there is a long list of things not to do, you should allow yourself to have some fun, too.
“Don’t forget to invest in your life and the experiences you are afforded,” said Gabrail. “It’s easy when you come into money to get caught up in all the ‘things’ you can buy.
“Of course, it’s fun to buy purses or cars, but spending money on experiences you can enjoy with those you care about pays dividends.”
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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