It’s a time-honored tradition: Lottery hits a big jackpot number (some amount in the $250 million to $1 billion range), predictable frenzy follows:
- Lines of hopeful daydreamers form at convenience shops during lunch hours.
- News stations dust off their animated “lottery mania!” graphic and gather B-roll footage for the evening news.
- Your co-worker who organizes office betting pools for the Super Bowl and March Madness invites everyone to pitch in to purchase a stack of Powerball tickets.
After all, you never know.
Actually, we do know. Most of us understand that the odds that we hold the winning ticket are roughly one in a million gabillion trillion. Or they might as well be, given that the real chances of hitting the jackpot for most big-dollar lotteries are one in 200-plus million.
That said, when lottery officials eventually name a winner or winners, it’s important to be prepared. You know… just in case.
Sign your winning ticket and then…
1. Practice your poker face
Until you’ve gone through the rest of this list, it’s probably a good idea to keep this whole “Dude! I’m filthy rich!” thing under wraps. According to lottery rules in most states, once you come forward and claim the dough you sign away your right to complete privacy.
It’s also a good idea to change your phone number, put an extra lock on your front door and move the garden gnomes inside so that reporters and ne’er-do-wells don’t trample the little guys and walk in on you rolling around giggling on a carpet of $100 bills.
2. Review your prenup (if you plan to buy a trophy husband or wife) and beneficiary information
Surprise! People can be awful and deceitful when obscene amounts of money and your mug are suddenly front-page news. There’s nothing worse than dealing with a stream of “long-lost ninth cousins thrice removed” and scamsters beating a path through your decorative garden gnome collection to get to your doorstep.
You can turn those people away (and in some states one way to keep the wolves in line — and your anonymity intact — is to set up a trust). But what about actual family members (siblings, parents, kids, spouses, exes and soon-to-be exes)? Here’s where up-to-date beneficiary forms (naming who will inherit your money) will ensure that your winnings go to the right people when you’re no longer around to pick up drink tabs.
You can (and, honestly, probably should) hire a team of financial pros to walk you through all of the details of getting your affairs in order before you hold up your hand and shout, “I won!” Be aware that the cost of hiring the lawyers and minions to claim your lottery winnings and cover all your bases can easily hit six figures.
Even if you don’t win the lottery, some estate planning basics should be on everyone’s “to do” list. Pull paperwork for any assets you might have (what’s in your retirement accounts, bank and brokerage accounts, and life insurance policies) and make sure your beneficiary designations are in line with your wishes. Check both the primary beneficiary as well as the secondary contingent beneficiary (in case your first choice has already joined you for heaven’s happy hour).
3. Don’t count your millions just yet
Easy come, easy go — at least when it comes to advertised lottery winnings vs. actual lottery winnings. For example, an advertised value of a $540 million jackpot is what you’d get if you opt to stretch your winnings over 30 annual payments. If you choose to receive the spoils of victory all at once, have your Sharpie handy when you’re handed that giant cardboard check. The lump-sum payout will slash several hundred million from the winnings (leaving you with $380 million using our example). But wait, you’re not done with tax math just yet. Skimming 25% off the top to cover federal taxes brings the subtotal down to $285 million. And that’s not yet including any state taxes you might owe, which brings us to…
4. Fill out a huge check to pay Uncle Sam
Lucky you if you’re a resident of the handful of states where residents pay no state tax on lottery prizes. Those states, according to USAMega.com, are California, Delaware, Florida, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington or Wyoming.
However, even if you are already a resident of one of those states when you win the lottery, there’s no escaping the IRS rules for federal withholding. First, the lottery is required to siphon 25% off winnings that are $5,000 or more. And then there’s the 39.6% that you’re going to owe on the portion of winnings that push you into the top federal income tax bracket (and gambling winnings, by the way, are taxed as income).
Before planning all the ways you’re going to blow your millions, spend a moment on USAMega.com to see how state tax rates will affect your new status as a member of the elite 1%. Then immediately sock away what you’re going to owe Uncle Sam so that you don’t have to pay any last-minute cancellation fees for the around-the-world cruise you booked for yourself and your 200 closest friends.
5. Google ‘past lottery winners.’ Pretend like you’re shocked
Many of the rags-to-riches-back-to-rags stories contain these financially ruinous missteps:
- Taking on too much debt
- Excessive family loans
- Tax evasion
In a very schadenfreude way, these stories make for some entertaining reading … when it’s not you they’re talking about. All of these self-inflicted financial injuries are avoidable if, after treating yourself and your loved ones a reasonably priced treat, you…
6. Be cool. Just. Be. Cool.
This might be difficult, but it’s important to at least act like the perfectly average, reasonable person you were before you won millions of dollars.
Sure, you can afford to write a check for a new wing for the house, fancy cars for all of your cousins, Caribbean timeshares and exotic household pets. That doesn’t mean you should.
A few weeks ago you had to plan ahead and save for big-ticket purchases. That gave you time to think through your spending and avoid loading up a shopping cart with future regrets. So why not put a cap and a strict waiting period on five-, six- and seven-figure impulse purchases from the start? (See No. 5 on our list for a reminder why this is a good idea.)
The rules of successful money management are the same whether you become an overnight multi-millionaire or build your first million the old-fashioned way:
- Live below your means.
- Establish an emergency fund.
- Don’t carry high-interest debt; if you have debt, roll it over to a lower-rate credit card until you pay it off.
- Invest for the future (and don’t overpay for the privilege when there are plenty of low-cost options).
- Plan ahead for big purchases, and sock away the money in a high-yield savings account.
- Hire a trusted financial professional — a fee-only planner — to help you craft a long-term plan and stick to it.
What to do with your next windfall
There’s no harm in playing “what I’d do if I won the lottery” with your pocket change as long as it doesn’t turn into a “when I win” financial plan.
Even if (when) your Mega Lotto Bagillion-Jillion Jackpot payday doesn’t pan out, there are probably other “windfalls” in your future (tax refunds, bonus checks, employer matches on 401(k)s, Hanukkah gelt). Take the time now to prepare to receive those spoils, even if it’s not in the millions-of-dollars range.
» Planning for retirement: How to get started at any age
Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Email: firstname.lastname@example.org. Twitter: @DayanaYochim.
This post was updated on July 31, 2016.