Napoleon54

I'm sure this has been covered before, but here's a new article with some fresh anecdotes/ case studies.

Cash windfall can lead to downfall
Bill Kirk and Emily Young
Published: October 28, 2007 01:58 am

For Lisa Arcand, winning $1 million in the lottery helped make her dreams come true. Or so she thought.

She took the earnings and bought a house and new furniture, went on a couple of vacations, enrolled her son in Central Catholic and opened a restaurant on Merrimack Street in Lawrence.

Then reality struck.

“Winning the lottery is not all it’s cracked up to be,” said Arcand, 42, a single mom and lifelong Lawrence resident. “Actually, it’s been very depressing.”

Today, less than four years after striking it rich on a scratch ticket, Arcand has decided to close her dream business — Fisherman’s Corner.

“I emptied my savings to get this place,” she said last month, standing behind the counter of the nearly empty eatery she opened just five months ago. “Now I’m behind on my bills.”

Unfortunately, Arcand’s story is a familiar one.

Many lottery winners end up worse off than they were before they won, says Susan Bradley, a certified financial planner who runs a practice specializing in helping people who come into sudden wealth.

“A lot of people who win are financially OK when they win,” said Bradley, who also runs a Web site called suddenmoney.com. “You hope they become really financially secure after they win. But many are in a worse position after winning because of financial commitments. It’s not unusual for them to start borrowing, and that’s how you get more into debt.”

Roughly one-third of lottery winners find themselves in serious financial trouble or bankrupt within five years of turning in their lucky numbers, according to Chelmsford wealth counselor Szifra Birke.

“For many people who come into wealth suddenly — whether they win the lottery, receive an insurance settlement or an unexpected inheritance — if they have not acquired good money skills prior to this windfall, often they struggle and make poor choices,” Birke said.

“If someone is in trouble financially, if they’re spending more than they are making or are relying emotionally on the lottery to bail them out, then that’s a big problem.”

Advice, good and bad, abounds

Financial windfall coupled with reckless buying and no concept of money almost always leads to trouble. This is especially true for people who decide to use their winnings to create a new business, said Birke, a psychologist on retainer with Lexington Wealth Management.

“If a person is not business savvy, they don’t know what it takes to run a business — $300,000 could disappear very quickly,” Birke said.

“You have to really understand the true cost of things. If you make a purchase (on your credit card) that costs $50 and it takes you two years to pay it off, you spent a lot more than $50. Sometimes people just don’t compute the numbers.”

The best thing to do is to hire someone with expertise handling money, said Robert Glovsky, director of Boston University’s Program for Financial Planners and president at Mintz Levin Financial Advisors.

“On the positive side, the lottery allows winners to do things they could never do before, whether it’s consumption or charity,” Glovsky said. “But what happens when the money runs out? Do they return to their old lifestyle? I would think that would be very difficult.”

A financial advisor, he said, can help put the realities into perspective.

Arcand could probably have used that advice, but instead of calling a financial advisor, she was contacted by a company that actually takes money away from lottery winners.

Soon after winning in April 2004, Arcand said she was aggressively pursued by Stone Street Capital, a financial services company that offered her a lump sum of money up front in return for all or a portion of her $35,000-a-year lottery proceeds.

“They call people who hit the lottery and offer to buy the ticket off you,” she said. “The offer was less than half the cash value. But I sold a piece of it — $15,000 a year, and I got $200,000 up front.”

The up-front money helped her buy some of the things she’d never been able to afford, but it also put her in a higher tax bracket, leading to a further erosion of her winnings.

“They don’t tell you all this,” she said. “You end up with this little bit of money, and then you lose.”

Stone Street Capital vice president David Lewis did not return phone calls, but the company’s Web site makes it clear what the Bethesda, Md.-based firm is all about.

“Free Quote, call 1-800-LUMP-SUM,” the home page states. A link brings visitors to a page that offers a variety of options for turning 20 years of lottery payments into quick cash.

“Convert your lottery winnings or contest payments into immediate, lump sum money!” shouts the Web site. “Our services are designed to fit the unique financial needs of lottery and contest winners by giving them lump sum payments instead of their current periodic payments. This means you can get the money you need in your bank account in one complete payment and enjoy the financial rewards now!”

The site encourages winners to sign up for a free quote.

Dan Rosenfeld, spokesman for the Massachusetts State Lottery, said the state knows about these companies and advises winners to be wary of dealing with them, or anyone else, for that matter.

“We have a whole list of groups that will buy your winnings,” Rosenfeld said. “We say, ‘Be careful, and only talk to who you want to talk to.’”

When lottery winners come in to collect their prizes, they are taken into a room called “The Winners’ Circle,” where lottery officials talk to them about how to manage their new-found money.

“Sometimes the winners listen, and sometimes they don’t,” he said. “Our customer service people talk to them about the folks who are going to call them on the phone and will try to get them to sell their ticket.”

The primary message from lottery employees to winners is this: Get a lawyer.

Bradley, of Sudden Money, would add another: Get a certified financial advisor.

“You win, you’re excited, you don’t sleep for four days,” she said. “You are sleep deprived by the time you decide how to take the money” — whether in annual payments or as a lump sum, if the choice is available. Some games, like the one Arcand won, don’t have that option and must be taken as an annual payment.

“Most people who win the lottery don’t have lawyers, accountants or financial planners,” she said. But quite often someone they know steps forward and acts as “the gatekeeper.” Unfortunately, that person rarely has the necessary expertise to manage large amounts of money.

“If you start off on the wrong foot, it’s hard to catch up,” she said. “The first six months are tough. People make commitments to themselves and other people.”

The right way and the wrong way

Peabody resident Paul O’Connor seems to have gotten it right.

He won $1 million on a scratch ticket in October 2002, but rather than spend the money he called a financial advisor and decided to live frugally.

O’Connor, 62, walked away with $35,000 a year for 20 years, but he kept his job as a technician at General Electric for roughly a year. After speaking with a financial advisor, O’Connor retired at 58 on his lottery winnings and pension.

The only thing he splurged on was a new Ford pickup truck. He still lives in the same one-bedroom apartment he has for the past 17 years.

“I still shop in the same stores,” he said. “There is that temptation for some people to go crazy, but you have to just live within your means. That’s the whole thing. When you win the lottery, you have to use your smarts about it because there is a lot of temptation.”

O’Connor, who still has another 15 annual payments coming, said that comfort is enough for him.

“I have a roof over my head and food on my table. Between the lottery and my pension, it’s enough to live on,” he said. “You’re comfortable.”

When Arcand won, however, her enthusiasm got the best of her. One of the first things she did was throw a party for friends and family, and it rapidly spiraled out of control.

“I spent $3,000 on a party at Mill City — there were 20 of us and people were ordering $200 bottles of wine,” she said. “I was kind of mad.”

And she didn’t hire a financial planner.

“I talked to a few people, but determined that putting money away wasn’t worth it,” she said.

And she kept spending.

She bought a house, went to Florida for vacation, got new furniture and bought a plasma TV, she said. Plus, she got her son into Central Catholic at a cost of $10,000 a year.

Then she decided to open the restaurant.

She had about $50,000 in a savings account, which she put into the restaurant, including a lease and renovations — mostly “elbow grease” on her part, she said.

She had always thought about opening a seafood restaurant, she said, especially since Langford’s on South Union street closed about 10 years ago.

“There’s no seafood place in this area,” she said. “There are a million pizza places, breakfast joints and sub shops, but no seafood.”

She opened in May of this year. Things started out slow — and stayed that way.

“It didn’t go as well as I thought,” she said, adding that at one point last month she wasn’t sure she could hold onto the restaurant until her next lottery payment in April.

She was right to have doubts. She recently pulled the plug on the restaurant she worked so hard to build.

“I’m getting out of the (two-year) lease, I can’t sink any more money into it,” she said. “I put a lot of time and energy and wasted money that I’m not going to get back. I gave it a shot. It didn’t work out. Oh well.”

Link

No doubt about it in my mind, I'd immediately give the majority of it to charity and not change my lifestyle one bit. Maybe buy a new vehicle and take a vacation, but that's it. Off it goes. Or set up a trust fund of some sort to build interest for the sake of charity. Either way I wouldn't spend hardly any of it, it'd go to doing good in the world. Same job, same apartment, same Nap, etc.

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cruelpupet

Summery of story.

Idiot wins lottery. Ends up worse off then before she won.


Basically thats it. People who dont have money, tend to not know how to handle money, which is why many lottery winners end up in that situation. And in this case in particular it seems that she jumped into starting a restaurant with no knowledge of how it works.

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Am I the only one who sees.

Maybe we can learn to be just like him.
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DaMaN

I'd make it work.....=)

Kevster

I already have the financial plans in place, a nice cash infusion would help them nicely that's for sure.

The one thing I would despise is the near-constant barrage of people mailing/calling you (since it's public knowledge).

__________________
I think over again
My small adventures, my fears.
The small ones that seemed so big,
For all the vital things I had to get and to reach.

And yet there is only one great thing, the only thing:

To live to see the great day that dawns,
And the light that fills the world.

-old Inuit song

johnnymk

I think that people that play the lottery week after week, month after month have a certain mind set in the first place.

Same goes for casino gamblers, too.

Jeffbx

I'd bet the majority of people who play the lottery regularly don't know how to manage money effectively - why do you think they buy lottery tickets in the first place?

If I won the lottery, first step would be paying off all of my ourstanding loans & then all the rest goes to my financial planner. I wouldn't quit my job, I sure wouldn't buy a new house. Then the $$ gets invested, shared with the family, pre-buy college credits for the kids, and you can bet your a** I'd be getting 2 of those Dell 24" LCDs.

VTGreg

I graduated from Central Catholic. Good school especially if your other choice is the Lawrence public schools.

Good to see that she didn't just blow it all and put her kid in good position to get into college with a good education.

A few have hit the nail on the head. People who spend money on lottery tickets in the first place probably aren't all that savvy with money in the first place. It isn't suprising that they struggle with the money when they win.

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ray

If I ever won over $1 million, I would hire 2 people. Estate Lawyer and an Accountant.

I have the financial background to know I shouldn't go buy my dream house and start my dream business, especially with only $1 million, but there are definitely ways to get there with some strategy.

zippyjuan

Winning a million dollars sounds like a lot but it really isn't. If it is paid over 20 years, you probably take home about $20,000 a year after taxes- not enough to quit your job. Granted lottery prizes are more than a mere million these days. I prefer not to join this form of voluntary taxation. I was reading somewhere in the local paper that only two companies control some 90% of lotteries.

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cruelpupet

Thats why you always take it in a lump sum. Ignoring taxes, you get about 70% of the jackpot if I remember correctly, and at 5% interest (which one should be able to pull off fairly easily) that would give you 35,000 a year extra to play with or save.

$35k also happens to be pretty close to the average annual income in the US.

The whole idea of 1 million not being a lot of money these days is an interesting perspective. True, inflation has devalued it since "Life styles of the rich and famous", but if not living a consumer whore lifestyle its still a nice chunk of change that can greatly advance your position.

ex. A conservative estimate would allow me to retire in 10 years (at age 37) if I was infused with just 500k now. (This includes withdrawing my current annual salary adjusted every year for inflation equaling no more then 5% of the principle so that it can grow indefinitely)

Daedalus

I think it's more like 50% in a lump sum...not including about 1/2 for taxes. So $250,000 left over. At 5% you're making $12,500/year on it, and getting taxed on the interest earnings too.

Thesifer

In almost every case you are still better off getting the money and investing it.

Lottery money can't fix stupidity.


And this says something right here:


No seafood in the area could be a sign that Seafood doesn't sell too well in the area, for whatever reason. And if a seafood place already closed down and no one opened one in their place, she would have better luck winning the lottery a second time.


The Lottery cannot fix bad spending habits, improper budgeting, and poor money management. If you had problems with money before you won, you will continue with them. If you let yourself get too into the money and forget your old habits, you will have problems.

It's all about self-control and intelligence.

__________________

Daedalus

I don't disagree with that statement. It's very easy to prove in fact. To make up for the 50% cut, you have to be able to double your money within the alternative payout period...usually 20 years. Compounding annually, you need to make 3.53%/year. If the payout period is 10 years, it's a bit tougher at ~7.2%. This ignores the differences in tax rates, though, which would usually require a little better return on the lump sum to break even.

wonkatania

I would take $1 million of the winnings and place it into a mutual fund with a 10% interest payback. I would live off the $100,000 yearly interest for a while. And, yes, I do realize that would mean waiting around a year at first while the interest accumulated. But after that, it's easy street. It isn't much but it is a very safe way to make money with money without the fear of losing your business.

On the plus side, and if all else fails, you still have the original Million. Have fun.

Prngr44

If you find a mutual fund with a guaranteed 10% payback every year let me know.

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cruelpupet

Its nowhere near that bad.

In NY with some of the highest taxes you generally walk away with around 60% of the jackpot after the lump sum and taxes

Daedalus

On $1M the effective fed/state tax is ~40%. The only way you could walk away with 60% is if there's virtually no penalty for taking a lump sum over a periodic distribution. But lottery amounts assume a distribution over time. To get a lump sum the payout is based on a net present value of the periodic distribution. It depends on the payment periods and discount rate assumed, but even a very low 3% discount rate over a standard 25-year payout yields a lump sum of 74% before taxes. If combined taxes are 30% (low) in this example, you would be left with ~52%.

cruelpupet

For some reason i remember it being 60%

cruelpupet

AHA!!!

I found out where I remember 60% from...thats how much you lose out of everything.

from:
http://davidwier.com/powerball.aspx

Lump Sum :
(approx) $540,476.00 / $389,143.00 (after 28% tax)

Per Year ( 26 yearly payouts (Mega Millions) ) :
(approx) $38,462.00 / $27,693.00 (after 28% tax)

gwilks98

I heard somewhere that the annual payouts are a bad idea because the money is not transferrable in the event of your death. If that's the case, I think it would be a smarter bet to take the lump sum, stick it in a bank and draw out 35k or whatever each year.

Oh, by the way. Figure this one out:
http://www.powerball.com/powerball/pb_prizes.asp

odds of matching ONLY the powerball:
1 in 68.96

The Powerballs range from 1-42. You'd think the odds would be 1 in 42 matches the powerball.

Edit: Ah...here's there answer:
"A common question is why the odds for winning the prize for matching 1 red ball out of 42 is not 1 in 42. The answer is that you must match the red ball ALONE to win the prize. If you match one or more white balls, you win some other prize, but not this prize."

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oblongmelon

It seems as though Lottery posts on G|A always have a good response..I'm happy to see that!
It's too bad that woman blew all her money as she claims..but if you ask me the best thing she did was give her kids a Catholic School Education. 10,000 a year per student is cheap. At one point I had ALL my kids in Catholic Schools at the same time. Even with the Multi Student discount allotted to us, we were still paying about 40k a year which included Uniforms, Athletics, etc..It was a well invested sum if you ask me. My kids are all doing very well for themselves plus they stayed away from the local "public school stereotype" , which in this area is very very bad. Granted, it was a lot of money, but it was for a good cause-my kids.
on a side note...
I would love to win the lottery. And yes, I play, but not every day. I also bet on horses, and play slot machines. Sue me. It's fun dammit. And no I'm not addicted to gambling. I don't do it everyday. But a few times a month..yeh. It feels good to win 20 bucks now and then, for the simple reason that I live in NY in a county that bleeds me dry on property taxes, school taxes, and even freakin city mandated garbage bags (which were only supposed to be a trial run at 8 dollars a package for 4 bags, and are STILL being used 9 years later)

DarkFury

Honestly, 1 million is alot only if you look at it from the "lump sum" value of it. If you don't have the finanacial skills in place to keep your 1 million equity and build on it to make more millions then yeah... its not alot of money.

That being said, with only winning 1 million... I definitely wouldn't quit working altogether... although I'd probably have a little more flexibility of how I wanted to work. Give me $5 million and then I could seriously talk about not working anymore and work only for my desire to work (at something I'd love doing... not just working to pay the bills.)

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cruelpupet

I think that anyone of average intelligence and a smidge of self control should be able to make 1 million last a very long time.

If given 1 million now, id probably choose to retire in 3 or so years and buy this http://www.yachtworld.com/core/listi...100&luom=1 26

if given 5 million id do it now and buy the newer 35' version the DF35