It’s a time-honored tradition: Lottery hits a milestone jackpot (like the $800 million Powerball prize projected for Saturday’s drawing), predictable frenzy of activity follows:
- Lines of hopeful but cranky people form at convenience shops.
- News stations dust off their animated “Powerball 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 are one in 292.2 million.
Dare to dream (with spare change from under the couch cushions)
In the spirit of complete and full disclosure, as of publication time our office lottery pool has a total of $2,097 ponied up by 110 people who have a 100% chance of receiving an email from me chiding them about the futility of playing this all-time record-breaking lottery. (Unless they win. In which case, drinks are on you guys, right?)
That said, when lottery officials name a winner or winners (my 110 new BFFs, for instance), it’s important to be prepared.
Here are six things to do if you do happen to win the $700 million Powerball jackpot.
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 on a carpet of $100 bills.
2. Review your family tree, 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 those decorative gnomes to get to your doorstep.
You can turn those people away, 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.
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 (IRAs, 401(k)s, 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 at heaven’s happy hour). Another way to keep the wolves in line — and your anonymity intact in some states — is to set up a trust.
3. Don’t start counting your millions just yet
Easy come, easy go — at least when it comes to advertised lottery winnings vs. actual lottery winnings. The $800 million advertised value of the Powerball payout 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 would be $498 million — minus, of course, a sizable tax bill, which leads us to …
4. Quickly establish residence in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming
Residents of these states pay no state income taxes. If those climates aren’t appealing, New Hampshire and Tennessee also work in a pinch, because they only tax income from dividends and interest.
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. (Opting for the lump-sum payout? So long, $124.5 million!) And then, come April, 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’ and memorize all the ways that things can go wrong
Many of the rags-to-riches-back-to-rags stories contain these financially ruinous missteps:
- Overspending
- Taking on too much debt
- Gambling
- Drugs
- Lawsuits
- Excessive family loans
- Tax evasion
- Bankruptcy
All of these are avoidable if, after giving yourself and your loved ones a reasonably priced treat, you…
6. Act like the perfectly average, reasonable person you were before you won
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 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 Powerball payday doesn’t pan out, it’s just a few months until Uncle Sam starts mailing out tax refund checks. That gives you time to plan how to make the most of a tax refund windfall, even if it’s not $800 million.
Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Email: dyochim@nerdwallet.com. Twitter: @DayanaYochim.
Image via iStock.
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