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THE 5 MOST COMMON MISTAKES LOTTERY WINNERS MAKE THAT THE $2.04 BILLION POWERBALL
WINNER SHOULD AVOID

BYMia Taylor
November 8, 2022 at 7:12 PM GMT
You might want to splurge on a big purchase or quit your job—but you should
consult a financial adviser instead.
Photo illustration by Victoria Ellis/Fortune; Original photos by Getty Images

The Powerball jackpot reached $2.04 billion Tuesday morning, making it the
world’s largest lottery prize ever. There were no winners for this past
Saturday’s drawing, which continued a three-month streak of the jackpot
increasing to record levels.



However, by Tuesday, officials in California announced that there was indeed one
winner.

With so much money in the jackpot, here’s a look at the most common mistakes
individuals make when suddenly coming into a fortune.  




1. CHOOSING A LUMP SUM PAYMENT INSTEAD OF AN ANNUITY  

Jackpot winners have two choices when it comes to how they wish to receive their
payout. The options include annual installment payments each year for 30 years
that collectively amount to $2.04 billion. Or winners can choose to take a
one-time payment—a sum that’s far less than the billions at stake. The immediate
cash payment for the $2.04 billion is $997.6 million, according to Powerball.

Taking that one-time payout can be the wrong move, says Pacifica Wealth’s Robert
Pagliarini, a certified financial planner and investment manager who specializes
in working with lottery and Powerball winners.

“People almost always choose the lump sum payment instead of the annuity, which
is hands-down the biggest mistake,” says Pagliarini. “I get it, I understand
why. People want the money now. The problem with that is then people can do
whatever they want with the money. For some people it’s totally fine—taking a
lump sum—unless you make some mistakes. And what we know about lottery winners
is that they don’t make the best financial decisions.”



The advantage of taking the annuity is that even when winners make some
financial mistakes with their windfall, there’s still another installment
payment coming next year and the year after, says Pagliarini. 



“You can gift it away, spend it too freely, invest it poorly, and then you get a
redo because you get that payment every year for the next 29 years,” Pagliarini
says. 

There are other benefits of taking the annuity payment as well—the delayed tax
burden chief among them. When taking the one-time lump sum payment, winners are
required to pay taxes on all of that money upfront. The federal tax bill would
likely be 37%, which is the highest tax bracket. And depending on where you
live, there will also be state taxes to pay. On winnings of $2.4 billion, the
federal taxes alone would amount to about $816,000,000.

But if you opt for annuity payments, you’re paying taxes only on the yearly
distributions, which decreases your tax burden substantially. And your final tax
payment is not due for 30 years.

Annuity payments can also allow winners to adjust more gradually to their
wealth. “Taking the lump sum may give the winner control, but can sometimes
overwhelm the winner,” says Michael Liersch, head of the advice and planning for
Wells Fargo. “Taking the annuity can help spread the winnings over a longer
period of time, helping the winner adapt to newfound wealth.”


2. OVERESTIMATING YOUR NEWFOUND WEALTH 

Clearly, $2.04 billion—a cash value of $997.6 million—is a lot of money. But
even when you’re talking about such large numbers, winners end up thinking they
have more money to burn through than they actually do.

Those who take the lump sum payment will have their winnings cut nearly in half
by immediate tax bills, says Pagliarini. What’s more, if you’re not the sole
winner of the big jackpot, the amount you stand to receive is reduced even
further. When there are multiple winners, the jackpot is divided evenly among
them all.

“If there are two winners, the prize gets split 50-50 and so on,” Pagliarini
explains. All of which means the amount of money you end up with is likely to be
less than you actually think.



The key point here is that it’s important to hold off on spending until you
understand the exact amount of winnings you’ll actually receive and the tax
burdens associated with that money. It’s a good idea to immediately contact a
tax professional to help sort through these questions and help you plan
appropriately. 


3. TREATING WINNINGS LIKE MONOPOLY MONEY 

When you win millions of dollars, the money may not even seem real, making you
feel more comfortable about spending it freely, without much thought. Some
financial advisers describe this as viewing the money like Monopoly money, a
reference to the popular board game.

What’s more, there are a variety of emotions wrapped up in money and how we
handle spending choices. Allowing emotions to drive spending and decision-making
as a lottery winner can be a downward spiral, one that may even lead to
bankruptcy.  

“The Monopoly-money mindset knows no boundaries. It’s hard for many to control
their material desires. Having a red Ferrari is great, but it would also be nice
to have a blue one,” says Philip Richter, cochairman, president, and partner of
Hollow Brook Wealth Management, a firm that provides wealth management including
investment management and tax and estate planning. “The consumptive nature of
modern American society can drive many of us to want more and more even if our
life is already abundant. If one did not grow up in a privileged world, it is
tempting to not only keep up with the Joneses, but exceed them by a wide
margin.” 

Pagliarini agrees, pointing out that because it’s such an enormous amount of
money, it simply does not seem tangible to people.

“Because you didn’t earn it and you know you didn’t earn it, you are going to
treat it differently. It’s not going to hold the same gravitas as if you earned
it. You’re going to spend it more freely, give it away more freely, and make
riskier investments,” says Pagliarini.

The best way for lottery winners to avoid this Monopoly-money pitfall is to have
a trusted investment professional as your partner who, as your fiduciary, will
look out for your best interests at all times. “This trusted adviser will say no
to frivolous spending and will draft a rigorous, quantitative, and ongoing
financial plan that takes into account income, expenses, risk, and asset
allocation,” adds Richter.



A financial plan developed by a professional will outline what can reasonably be
spent on a monthly, quarterly, and annual basis. Which brings us to the next
mistake:


4. NOT CONSULTING WITH FINANCIAL PROFESSIONALS 

Handling the level of cash associated with a Powerball jackpot is a
once-in-a-lifetime occurrence for the average individual. But for some people,
such as wealth managers, CPAs, financial advisers and the like, managing
enormous sums of money is what they do day in and day out. 

If you happen to be among the lucky winners, immediately surround yourself with
a team of experienced experts who can help you successfully manage your
financial future, including advising you on the wisest investments to make and
how to budget the money.

“That team should include an attorney, a tax person, and a financial person,”
says Pagliarini. “You want to work with people who have experienced this
dozens—if not hundreds—of times. And you want to rely on them.”




5. FALLING VICTIM TO LIFESTYLE CREEP 

With millions—or sometimes even billions—of dollars suddenly at your fingertips,
it’s only natural to be tempted to splurge on major purchases like a car or
house you previously couldn’t afford. These sorts of purchases are examples of
lifestyle creep, which is when an increase in income leads to excessive
discretionary spending. But all of those new possessions can also be expensive
to maintain and increase your cost of living.

“Having unbridled access to hundreds of millions of dollars provides unlimited
opportunities…planes, helicopters, racehorses, and multiple homes suddenly are
not only within reach, they are a tangible reality,” says Richter. “These types
of luxury assets require enormous upkeep and generate significant ongoing
expenses.”

In other words, building empires made up of multiple homes, cars, and other
major purchases can lead to expenses that ultimately exceed your financial
capabilities—even as a lottery winner.



“People really try to change their lives too much.They feel like they need to
upend everything just because they have all of this money,” says Pagliarini.
“But you don’t have to do that.” 

Instead, figure out what’s worked well for you in the past, what you enjoy and
what you get pleasure from. And focus on those things. “Try to use money to
improve your life rather than radically upend it,” says Pagliarini.

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EDITORIAL DISCLOSURE: The advice, opinions, or rankings contained in this
article are solely those of the Fortune Recommends™ editorial team. This content
has not been reviewed or endorsed by any of our affiliate partners or other
third parties.

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