It is good to see you did your research this time, Spartydog. But, again, you are wrong in your view on current USA lotter distributions.
A person can’t avoid paying lottery, jackpot winnings because before this is ever recieved by the winner the taxes are removed. Please, explain how a person can “try to avoid taxes” on their winnings if they already pay the taxes before they get the money.
And, the person you made your initial snide remark to, Jman, specifically said in his comment that you quote, “$25 million after taxes.” You snidely infer Jman has no brains because you say he is not taking into account the taxes and you even quote him actually taking into account the initial taxes. nuff said.
I read a particularly tragic story recently about a Canadian man who won $10 million and blew through it in seven years (on partying, gifts for friends, a failed business). He ended up getting into trouble with the law, and doing odd jobs to make ends meet, then hanged himself in his parents’ garage.
I’d heard someone say you take 10% and blow it. Get it out of your system. Then, invest the rest.
For me, I’d be more afraid about the tendency of friends and relatives to start hounding you. A lottery winner down in Palm Beach kept getting mail addressed only as “Powerball Winner” and he had to tell the post office that unless it was addressed to him by name, he didn’t want it. He’s done a lot of good charity work. For instance, he spent $60,000 to help a woman regain her eyesight. But doesn’t that count as a “gift,” and doesn’t the woman have to pay taxes on the amount he spent on her surgery?
I wouldn’t tell anyone I won the lottery. Anonymous gifts to friends and family. Ivylad thinks people might wonder why I’m able to quit my job and how we’re able to go traveling, but there’s wondering and being too polite to ask, and then there’s knowing someone’s got a few extra bucks lying around.
Darn it, Shag, I was so hoping that the answer was “hookers and blow”. Another dream shattered…
A previous discussion as to whether it is better to take the lump sum or the annuity. Interestingly enough, the Finest Minds of Our Times (Straight Dopers) could not agree on which was the better choice. From what I could tell from the discussion, the annuity is based upon a competitive interest rate.
I’ve certainly heard the old joke that the lottery is just a tax on those who are bad at math. But, I only spend a few bucks on tickets, so for me it’s just a petty cash type outlay, like the newspaper or coffee. It’s just a cheap thrill. And for me, it’s self regulating, so I don’t let it get out of control. When the jackpot gets big, I buy my tickets. Eventually, someone wins and it ain’t me. I sulk and refuse to buy tickets for a few weeks. The jackpot grows, and there I am buying a few tickets. Lather, rinse, repeat…
Here’s the problem though. First of all, after taxes it’s only about %70 of $135,000. The other problem is time value of money. Every year, cost of living increases will decrease the real purchase power of the dollar. In ten years, $100,000 will not be worth anywhere near what it is today.
And finally, $100,000 a year is just not that much money. It may seem like a lot if you’re dirt poor, but it’s not gold helicopter money.
If you grow up poor or working class, you are probably not prepared to handle a huge windfall. Not only do you probably lack basic finance and accounting skills, but how do you relate to your friends and family who are probably still poor. Many probably have feelings of guilt that they are so well off while their friends and family are struggling. People may resent them.
What he means is that “rich” people have a lot of money. “Wealthy” people own assets that make money for them. For example, a lawyer who makes $200,000 a year is “rich”. He has a lot of money coming in, but should he lose his job, he will only stay rich until the cash runs out. The partners who own his firm are “wealthy”. They own and control the asset that is generating money. They can’t arbitrarily be fired. In accounting terms, wealthy people may or may not have a high revenue but they have a large amount of revenue generating assets. Rich people have a high revenue or their only asset is a large chunk of cash.
Rich people who invest in real estate, good businesses, stocks, bonds, etc become wealthy. Rich people who buy gold bathroom fixture, cars and other affectations of the wealthy become poor.
Well, I was thinking more about $3 million after taxes (or can I get away with claiming I was thinking of the Japanese lottery, which is tax-free?), but that’s a good point, which many wannabe-winners probably never take into account.
And while $100,000 a year may not be helicopter money, it’s enough for me to never have to work at an office job again.
Its a pretty clear anti lottery paper so Id be interested in the counter argument from lottery companies, if there is one.
I would have thought a fairly large amount of lottery tickets are bought by problem gamblers. That is they’re overrepresented as winners because instead of one ticket a time they buy 20 or the like. Id be interested in knowing how things go after you get that comparatively small percentage of people buying tickets out of the equation.
What I read the main problem with winning was was people being a bit too quick to say ‘stick your job’ and then realising a few weeks afterwards they actually missed it a fair bit even if they were richer now.
Right- same here. I buy $2 worth of tickets per Lotto. The daydream is worth the $2- handsdown.
You DO end up issing the money away however. I consider myself VERY economics- smart. But my Dad left me a small bundle. Knowing that I’d piss it away, I put $10000 into my retirement fund, paid off every bill, and bought a Saturn for cash. Wise investments. The other half I did piss away. However, I had a LOT of fun doing so.
I do know one guy (a FoaF) who did “win the Lotto” here in Ca- $3million. He carefully planned it out (hired a CPA and everything) about 1Mill went for federal taxes, he put one Mill in investments, and he bought a house and such with the rest. But note the "investments’ went south when the market did it’s downturn. I had advised him to “buy an annutity”, and now I heard he says that would have been the right way to go. Last I heard he was doing OK, but he did have to go back to work. That’s the problem with “investments”- the StockMarket can go bad, and Gov’t bonds are far too easy to cash in. So-
**
BUY AN ANNUITY.**
If you win the Lotto- or get any other large windfall- plan as follows: 1/3 for taxes, 1/3 to spend (& maybe invest some in the the market) 1/3 for an Annuity. If you did that with a mere 3 Mill payoff, you’d have around $5000 a month for life- with no real way to ever touch the capital. Then buy the House and the Porsche.
They can, and often do. Let us say you win $10 mill here in CA. CA doesn’t tax their own Lotto winnings. So- you’d have Feds only. Yes, indeed they take out Witholding. AFAIK, they take out 20%. But even if they take out 25%, you could very well have to pay around 33% on that cash. Thus, they withheld 2.5 Mil, you owe 3.3 mil, leaving a bill of $800K, which if you "frittered’ fast enough, could be a nasty surpise. :eek:
Wouldn’t the amount you’d take home out of the bond earnings depend on the type of government bonds you buy? Earnings from treasuries would be hit with the full tax burden, but earnings from munis are generally exempt from federal tax. Of course, there’s always state taxes and the AMT, although some munis are exempt from those as well. (I’m assuming that Sublight’s figure of $3 mill was after tax.)
Of course, that’s all a pretty involved decision for someone who has no familiarity with investments. That and your point about the time value of money (which may mean you’re better off–even after taxes–to find a more aggressive investment like stocks) reinforce your point that someone growing up poor (or just unfamiliar with financial planning) is not in good shape to handle such a huge windfall.
You could probably do Ok for a while if you are single. However, in certain markets like Boston (where I live), New York, and San Francisco you are looking middle-middle class living at best for a family of three or more. My wife and I had to live on that for a while and it was barely doable even tough we are both excellent with money and had family to back us up. I am not doing that again if I can help it.
I remember back when I was a college student and wondered what people did with those 80K incomes and now I know. Many people have know idea how 100K can fall short when you live in the land of 500K fiver-upper houses and have two people with work associated expenses and child(ren) that you have to pay for. I’m not bitching. That is just reality. The typical middle-class dream can be insanly expensive if you do everything correctly (like savings and proper retirement planning).
Those cities are expensive to live in because there are well-paying jobs there and the populace can afford it. If you had $100K a year coming without working, you wouldn’t have to live in the city.
Actually, I did assume the $3 million was after taxes. The interest you earn will also be taxed as regular income (about 30%).
Any property you buy will probably incur property taxes as well.
Funny, I just saw a show last night on lottery winners (10s of millions) and how their lives changed. One guy had all this crap like gold faucets and suits of armor and $100k chandelears and such. But he figured that he was earning something like $18,000 a day in interest. His rational was “hey, if I buy something for $50k, I just don’t buy anything for a few days and I break even”. Which kind of makes sense. At the end of the day, you really want to be left with $0 when you die. It’s just that most of us don’t know when that will be.
Other people did sensible things like move into wealthy neighborhoods where they wouldn’t stand out so much. One guy didn’t even have a phone because he was sick of people asking for money.
Personally, I don’t need that many millions. Just enough to buy a nice Manhattan appartment, maybe a shore house, a couple of cars, a really nice home entertainment system, some clothes and furniture (nice, but not oastentatious) and that’s about it. I’d take a “lifestyle” allowance and the rest I’d invest sensibly.
Assuming today’s MegaMillions ticket is a winner, it ends up being $58,575,000 cash up front, after taxes. (The arithmetic that most people don’t do when they think, “I won 168 million dollars.”) That earns a bit over 1.9 million after taxes every year for twenty-five years, after which you still have 58 million. Or you can take 4.7 million a year for the twenty-five years, after which you have bupkis. Money management folks might do somewhat better on the 1.9 per year, but any fool can do what I am describing.
I would modify that to the extent of paying off my house, and then not touching the rest. The effect of not having any more mortgage bills would, in and of itself, provide a quite sufficient increase in my luxury-spending budget, and I could let the rest of the principal sit earning interest.
I’d agree that most lottery winners who have never had the experience of dealing with large amounts of money don’t know what they are getting themselves into.
The person who wins 3.5 million (after taxes) and buys that 2 million dollar home and quits their job for life may not comprehend the costs involved in keeping that 2 million dollar home.
Property taxes alone are gonna cost them and arm and a leg, then there’s home owners insurance which probably isn’t cheap on a 2 million$ home, maintenance costs (guess how much a new roof costs on a 10,000 sq.ft house, especially those fancy clay tiles). Then there’s gas and electric bills. Don’t forget furnishings for all the rooms. And what about those 5 acres your mansion is on? You better like doing yard work or have enough money to hire landscapers for life.
I don’t think Joe apartment renter really comprehends what a “dream home” can cost you over 30 years of ownership.
And this doesn’t even include those lottery winners who dream of owning “multiple” homes.
Well just to add some stories… I’ve heard of a few Brazilian lottery winners going poor again… usually from overspending or buying rotten companies. I doubt the 95% figure though.
Those who do well or keep a better balance have usually bought a farm or started a small business it seems.
As for myself I’d want to live of principal all my life… I’d actually avoid spending on the first year or two while I get the investment in varied areas fine tuned. Once the interest machine is working well I’d travel over the world just about half the year…
A stupid little story that might illustrate the point of the OP.
I took a year off between high school and college to save some money. During this time two things happened: I turned 18, and the Massachusetts Lottery Commission was formed and started the first millionaire lottery game (I seem to recall it was called “Big Money”). So, I was legal to buy the tickets, and there they were on every counter.
At the time, I was making about $90/week (yeah it was that long ago), or about $4500 for the year I took off. The lottery would pay out $50K/year for 20 years. Over ten times what I was making. “If I won, I would buy a house and never have to work again!”, I thought to myself.
Of course, I didn’t win. However, if I had, cut ahead 20 years to the end of the annuity. The last $50K payout was still a decent salary, but certainly not the sort of money where one could call themselves fabulously wealthy. I never would have considered a money manager or an accountant. I would never had been to college. I would have pissed it all away on absolutely nothing of value, probably given a lot to friends (who would have strangely multiplied). I would have no job, no skills, no higher education, no friends, and an inflated opinion of my self-worth. For the next ten or more years after the last payment, I would have got real good at asking “Do you want fries with that?”
It doesn’t surprise me that people can burn through that sort of money in the blink of an eye.
I’m a financially responsible 46 year-old, but I think it’s quite likely that I would have self-destructed if I had won a lottery anytime before earning my own money and learning how to handle it.
I’ve always thought I now have the frugality, discipline and rationality to handle such a windfall. But reading the story about Jack Whittaker gives me pause. He seems to have some pretty nasty demons that came out when the money came along. But he also tried very hard to handle things responsibly at first. E.g., setting up an organization to investigate requests for mercy donations like a sick child needing a life-saving operation costing 10 grand. If I had $100 million, I would have a hard time turning down a person with a genuine need like that. But if I didn’t learn to pretty quickly, I would go broke.
I might do something like this if I won a gargantuan sum:
Figure out how much I really need to never want for anything again. It might be on the order of $3-4 million. (It might be smart to get some very good supplemental health insurance, or pre-paid medical services in the event of a major health problem). I already can pretty much buy anything materially that I want – I have a good job, I save a lot and my wants aren’t all that expensive. I have no interest in expensive cars, vacations or clothes. My house is almost paid for, so I would simply invest the remainder (maybe after buying a few nice guitars).
Decide how much I will give to which friends and relatives (and a few ‘non-emergency’ charities, like cultural foundations and educational institutions). I’d be generous. But I would also make it clear to them all that this would be all they got. Period.
Donate the large remainder, with adequate publicity, to a very happy charity, one that handled emergency things like ‘mercy’ requests. This would allow me to refer such requests with a free conscience.
