A resident of South Carolina finally stepped forward to claim the Mega
Millions jackpot from last October. Although the prize was worth around
$1.5 billion, the winner – who wished to remain anonymous – chose the
cash option, a one-time payment of $878 million.Get more news about
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This begs a question: What should you do if such a windfall falls
into your lap, whether a jackpot, a large inheritance or huge profit
from selling a business?
I have pondered this for years as an economist researching personal
finance issues. I also ask my undergraduates every semester what they
would do if they suddenly got $1 billion. The standard student response
is to pay off their sizeable college debts and travel the world.
While college is expensive and traveling to exotic places is fun,
neither will use up much of a billion dollars. But yet somehow many
people manage to win big and squander it quickly.
Here are a few tips based on research for how to handle an
unexpected windfall.As I noted in a recent article, people who come into
large sums of money end up bankrupt. My own research found that the
average person in their 20s, 30s and 40s who was given an inheritance or
large financial gift spent or lost half the money relatively quickly. A
2011 paper found that people who won mid-sized prizes in the Florida
lottery were more likely to file for bankruptcy than small lottery
winners.
The data suggest it takes time and experience to radically adjust to
a different lifestyle. Given these problems of self-control, my advice
is simple. If you win the lottery, do not take the lump sum payment. In
the case of the Mega Millions jackpot, that allowed a winner to receive
$878 million immediately – before taxes.
Instead, take the option to receive annual payments over 30 years,
which is still an incredible amount of money each year. And if you
happen to have issues with self-control and spend the entirety of your
first and perhaps second payment on fancy homes and cars, you still have
28 or 29 years of additional payments – which get larger over time – to
get your financial house in order.
If your windfall came by another means, such as inheritance, it’s
still easy to handle a self-control problem. Many insurance companies
and brokerage houses sell annuities, which operate just like that
30-year lottery payment option.
An immediate annuity is a simple contract. You give a certain amount
of money to an insurance company and in return it gives you a periodic
payment, which factors in inflation, for either a fixed term or for your
entire life.
The Wall