A Windfall or a Worry?

by | Cash Flow, Weekly Column | 2 comments


lottery2.jpgWith the current economic news, “investing” in the lottery might be tempting. But before you go buy a bunch of tickets, here’s a story I recently heard from an old friend. He and his wife had won a million dollars in their state lottery last year. He told me that after all the initial excitement, he now wishes they had never won the money. “It’s caused more problems than it’s worth,” he said.

I found this interesting. I’ve long believed that winning a large sum of money, despite being a dream for millions of people, is a mixed blessing. That belief has been supported by considerable anecdotal evidence, and his story gave me further first-hand confirmation. As we continued to talk, he described the pressure that managing the money had put on his family’s lives and relationships.taxes.jpg

First was the discovery that $350,000 of the million dollars was kept for taxes. That angered him a lot. Before they retired, his wife had been a waitress and he a teacher. They never experienced paying more than 10% of their income in taxes, if any at all. They never dreamed that people could pay so much of their income to the government, and that fact had taken him by surprise.

Next came the guilt of having so much money when he and his wife perceived that their kids could use the money more than they could. Their Social Security and pensions come to about $45,000 a year. “Our kids struggle so much, and we have my pension and our Social Security, so with the winnings we have more than enough,” he told me. So another $300,000 went to the kids.

What to do with the remaining $350,000 is still causing some stress. He decided to wash his hands of making the investment decisions. His wife has put the money in two different investments, pulling it out of the first and incurring some penalties. They have not sought out any professional help, although they’ve talked about it. “I told her she needed to give a financial planner a call, but she won’t.”

The news here is that there is nothing new with this couple’s experience. I’ve read and heard the same frustrations and sadness with “sudden money” events time and time again. Within less than one year, 50% of their after-tax proceeds are gone, largely from trying to rid themselves of the guilt of having an amount that they considered more than enough.

Of course, several money scripts are operating here. “We don’t deserve money we haven’t earned” is a common one. “If parents have money, it’s their obligation to help their kids” is another. They have also made an assumption that their pension and Social Security will continue to keep pace with inflation and always be there.

Had they invested the $650,000 in a properly diversified portfolio, it could have generated $24,000 a year, in inflation adjusted dollars, for the rest of their lives. They also would have had a 90% chance of their money never running out and growing with inflation.

They could have also reinvested the earnings instead of choosing to supplement their income. That way the windfall.jpginvested winnings would have provided a cushion in case their retirement income did not keep up with inflation or in case they faced a health catastrophe. Then, if they didn’t need the money, it would go to their children as part of their estate.

Instead, if they continue down the path they’ve been on, there is a pretty good chance nothing will remain of their winnings five to seven years from now. And in the meantime, they haven’t even enjoyed this windfall.

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