Most people who can follow that train of logic and think rationally about financial planning don’t play the lottery in the first place.
Like a few others in this thread, I have a stable job and a 401k and I live below my means, and occasionally I throw a few bucks at the lottery as entertainment, and if I won the lottery, I’d probably be able to manage it well. But we’re not the typical lottery player. The typical lottery player is someone who’s fairly poor, very bad with money, and buys lots of lottery tickets.
I also think that most people underestimate the way that a large windfall can really wreck relationships. No matter how generous you are with friends and family, or how well intentioned your plans, there are going to be lots of people in your life who feel that you ought to give them more, and it’s going to come between you. And you’re going to start wondering how many people are being nice to you because they want something from you.
NFL players are probably even worse off as far as this goes. Even an average NFL player has spent their entire time playing football being a standout star player. They’ve been the biggest fish in small (and increasingly growing) ponds, and things have been going like gangbusters. The world is their oyster. And now you’re going to sit them down and tell them they’re probably just going to have a few years of uninspiring play and they need to save for retirement? Good luck with that.
At least lottery winners (and many entertainers) have had the experience of being poor and struggling as an adult.
The idea that most lottery winners lack the skills to monitor their spending from the article linked earlier sounds the most compelling to me.
One thing that came up in the stuff I’ve been reading is how rich people tend to buy appreciating assets (investments of various sorts) while many middle class people tend to buy depreciating assets such as cars and boats that not only lose their value but also require additional money to keep around.
Poor people live paycheck to paycheck, they’re used to spend everything every month. So they don’t even have the skills to limit their spending on those depreciating assets to something within their means and then when the money runs out the bills for that mansion, the cars, the boats and so on keep coming.
If you’re poor, it’s not even that insane to spend a little money on lottery tickets. $10 is not going to make your life better in a meaningful way, but winning $100k or even $10k could make a profound difference. Of course you don’t want a one in ten million chance of a hundred million but a one in ten thousand chance of 100k in that case.
Many lottery winners, being 50-80 years old, or impoverished, grew up in an era, or background, when $1 million was a lot. But today $1 million *isn’t *a lot, because of inflation.
So someone of that age may win $1 million and think they’re set for life and spend carelessly.
Slight tangent but people brought up athletes:
An acquaintance of mine played AAA baseball and knew some Major League Players. He told me one reason a lot of those guys are broke is that the low level guys feel a lot of peer pressure to keep up with the big contract guys (at least many years ago when I was speaking to him he told me this). They make the MLB minimum wage but spend like they have a $20 million contract because they feel like they have to.
It happens with Wall Street guys as well. A friend of mine who works for an investment bank was Manhattan apartment hunting. The realtor suggested with his income he should be looking for places in the $10 million range. He, of course, asked if she was out of her mind. Apparently, the logic is that these guys buy places that are way more expensive than they can afford and supposedly it drives them to work harder.
A lot of them also live paycheck to paycheck, spending their annual bonus (which can be multiples of their salary) before it’s cashed.
During the financial crisis, I read one story about a trader making over $200k a year who lost his job and ended up working as at The Palms. The article described his lifestyle and I was like, he couldn’t afford to live like he was in Manhattan when he had a job.
That’s kind of what I was going to say; I suspect with a lot of short-time NFL players, there’s a lot of cultural pressure to “live large”, so to speak, with the cars and the clubs and the women and the bling, even if the sensible thing is to buy a middle of the road but nice new car and invest the rest. Kind of a notion that if you make it big, you have to show it off.
I’d be willing to bet that most lottery winners who go broke are just so gobsmacked by the total amount of money that they can’t really comprehend it. I mean, if you’re some guy who makes $9.37 an hour, your touchstone for money is probably more or less centered around bi-weekly paychecks of $750 or so. Not a whole lot of money really. So when someone drops 5 million bucks in your lap, it seems inexhaustibly huge, even when you’re spending it 50,000 bucks at a time. Until it’s not, and then you can’t or don’t know how to stop that bleeding.
I can’t tell you how many 15-30 year old lower-middle class white guys I’ve heard say “fuck it, if I get rich, all of my friends get rich too”. Which is pretty much a promise that they’ll piss away every dime trying to make everyone but themselves happy.
Pretty easily if you take out a mortgage, boat loan, six car loans, and 23 credit cards, then proceed to give all your cash away to your friends, relatives, and hookers.
Here in Australia the idea that the average multi-million dollar lottery winner is broke within 18 months is plainly a nonsense and I am sure it is overseas as well. One of the several lotto games creates about 30 millionaires a year in one state alone. All up probably several hundred people a year in Australia win over a million. The lotteries provide immediate counselling and advice to winners and put them in touch with finance experts.
You certainly hear of the occasional idiot who blows their windfall but with the media’s love of bad news I am sure every single one of them gets some coverage. I have only once ever seen a media piece on “good news” lottery winners and they covered lots of people who had got out of debt, set up their family members, gone on holidays and then just settled down living a life without any money worries with money invested for when they wished to retire. One couple had set up a food service for the homeless. One guy was spending his windfall by taking all his friends and their families on a holiday every year at his expense. All sorts of different stories. They are, I think, the “average” lottery winner.
Most people I know have the odd flutter on the powerball/lotto and if you asked them what they would do if they won most have mundane plans that often don’t even include quitting work.
Here are a couple of links that help make the case that is is confirmation bias that leads people to believe that most winners end up broke:
It happens with people who make great money every which way, but IME not common among WS people. Most of many I’ve known are more conservative with money than average people are. I’ve only personally known one highly successful athlete though, and more of a household name as a front office executive than in his playing days, also happened to be very conservative with money.
But AFAIK the image of WS people spending through their money is more movies/TV/pop culture type thing and athletes doing it seems more backed by actual stats.
As I recall, the lottery officials gave him referrals to wealth management people. He was one of the smart ones that took their advice. He told me that it’s family and friends that cause the most problems for lottery winners (as opposed to charities). He used to call his financial advisers “The Three Wise Men;” and he became very skilled at saying to potential money seekers: “That sounds like a great idea. Write up a proposal and submit to my financial advisers.” This was back in 2003, and he’s still doing fine. There are a million stories about the lottery winners that fail. At this point I’d like a few more stories about how the ones did that managed to use their money wisely and not go broke.
That study is based on responses to a mailed questionnaire, and therefore has results from a highly self-selected group. People who really shit the bed after winning are significantly less likely to respond to such a survey. The link only includes the first page of the paper, but if it’s reputable research I’m sure the author will have mentioned selection bias as a potential flaw.
This article from Fortune cites studies that indicate possibly as many as 44% of winners of “large prizes” end up in bankruptcy within five years. (That study was conducted by Camelot Group, which runs lotteries in the UK, and presumably has access to a lot of data about lottery winners there.)
As far as I know, my millionaire friend from my previous post still plays the lottery.
This reminds me of the old saying “We can’t afford to be poor” sometimes said as “Being poor is expensive.” i.e. a poor person buys a bed they can afford but because its cheap it only lasts a year. Buying a bed that is twice as expensive may last over twice as long. It costs more, but really costs less in the big picture.
My wife and I have a discussion similar to this. In her mind if we were suddenly gifted millions of dollars she’d give some to her siblings. I’m more of the mindset that at most I’d allocate monies for their kids college education or something like that, but there’s no way I’d just disburse a bunch of my money to family or friends.
I think a lot of people vastly underestimate what their expenses will be. If they win 20 million dollars, for example, the (US)government takes 25% off the top and they get a cash payout of $15 million. They may then go and buy a $5 million house figuring that they’ll have plenty left over. However, they don’t account for the fact that with the actual federal and state taxes, they will actually owe closer to 50%, so there is another $5 million gone. Then they don’t think about the fact that upkeep and taxes on a $5 million house will run another 1-200K yearly. Between cars and vacations and friends and family, the rest can go quickly (because when you won $20 million, everybody thinks you can spare a few hundred thousand). Then they are stuck with the house that is paid for but still costs 1-200K yearly just to maintain. It’s not hard to see how people can go bankrupt.
Sort of know one big lottery winner (in-laws of a former acquaintance). They paid off their mortgage, bought new cars, took nicer than usual vacations and helped their grandchildren out with college funds. No sad ending there.
I usually buy a ticket every week, for sure when it builds up. I wouldn’t blow the money. No big lifestyle changes. I’m not a fool with my money now and that wouldn’t change. Retiring earlier and taking more exotic vacations would be my two major goals. Maybe some new cabinets in the kitchen.
My wife laughs at me because my fancy, exotic if-I-win-the-Powerball car is a loaded 2016 Mazda 3. What can I say? It’s a damned sweet-looking, reliable car.
I have a pet theory that a lot of the people who say “winning the lottery wouldn’t change me, I’d keep my job and my only splurge would be a subscription to Jam of the Month club” don’t actually know how they’d react to winning millions.
