When you google Lottery Winners Stories, you find that 90% of winners go bankrupt within 10 years of winning. At first blush, that sounds pretty crazy, bankruptcies aren’t that widespread, why would winners be so much more inclined to have such financial difficulty? Like any general numbers, we don’t really know enough of the details to pass judgment, but I do have my suspicions. People in the top 10% (family income above $125K or so) are far less likely to play the lottery, so most winners are from the lower income levels, spending money on tickets that should instead go toward savings or debt payment. They are more likely to take their windfall and blow it on cars, jewelry, and trips they have been envying from seeing such spending on TV. In their case, money not only doesn’t buy happiness, it brings trouble.
One thing they don’t realize is that if they take a lump sum, a 10 million dollar prize is usually awarded as half that sum immediately. After taxes, they are left with $3 million or so. Who has that kind of money in their hands and doesn’t hop in the car and go shopping? But this money now needs to last forever. On a 4% withdrawal rate, they should be limiting their withdrawals to a gross $120K/yr. Depending on what they are invested in, taxes will be due each year, so they won’t quite have even that to spend.
On the other side, you have the annual payout, but keep in mind, after 20 years, the payments stop and you had better saved and properly invested enough to keep up the new lifestyle.
All in all, it’s unfortunate that this dream turns into a nightmare for so many. But, as they say, you got to be in it to win it.
Joe
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August 28th, 2009 at 5:09 am
[...] Joe Taxpayer finds out why lottery winners are going bust. [...]