Aug 25

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

written by Joe \\ tags: , , ,

5 Responses to “Lottery Winners Going Bust”

  1. Friday Links | The Canadian Finance Blog Says:

    [...] Joe Taxpayer finds out whylottery winners aregoing bust. [...]

  2. Lottery player Says:

    Zip code analysis shows that lower-income people indeed are more likely to play the lottery than higher-income people. People who don’t have a lot of money often have family members who likewise don’t have a lot of money, so I suspect that lottery winners frequently have family members asking for money, outright gifts, or “loans” that are never repaid. And even if your relatives don’t ask, wouldn’t you share lottery winnings with relatives? I would.

    Also, if you opt for receiving the money over 20 years (or 26 or whatever), keep in mind inflation. If you have been working for 20 years or more, just think of what your salary was 20 years ago. It’s probably about half, maybe less.

  3. The Ghost of Jack Whittaker Says:

    Although the lottery proponents want everyone to believe it is played equally by all economic groups, in truth it is played more by poor people and even more so in ethnic areas. I hardly ever seeing anyone in stores, etc in better parts of town playing the lottery, and most people will tell you the same.

    The ‘lottery’ folks are always on the wrong end of things. Given their history of falsehoods and tweaking the truth, its hard to believe anything they tell us. For one, their campaign to not give winners a choice of how to claim major prizes by anonymous or blind trusts, instead forcing all to claim in public is a crime. Yet, their logic, that it helps ‘promote’ the lottery is bogus. It exposes winners to unwanted attention and danger for them and their loved ones. Some states, such as Virginia, are the worst in that regard, going as far as trying to get the legislature to pass a law making it illegal to ever allow winners to claim with a choice.

  4. JOE Says:

    I can only imagine what it would be like for the guy who wins a smaller amount, say $2M. $100K/yr added to his income might net him $60K or so. But the publicity alone destroys him, forget the thieves, just his friends/family who think “lottery winner” and have their hands out.
    Thanks for the visit and comment!

  5. Hatti Hamlin Says:

    Sadly, most people have no concept of how little a million dollars is! They also don’t realize that the lifestyle they’re purchasing with the money they won imposes permanent extra costs. A big new house may mean property taxes and maintenance costs that far exceed the amount of money they were earning pre-lottery winnings. If “investing” in the lottery were a smart choice. But if the statistics are right, and Americans spend $500 annually on lottery tickets for every man, woman and child, imagine what that money could do for a couple if they invested it! $1,000 a year for 30 years would make a nice nest egg–and be a sure thing rather than a long shot!

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