Congrats! You just won the lottery... You're f**ked

That is how one of the most interesting Reddit threads I've read.

The question "What's the happiest 5-word sentence you could hear?" was asked in an AskReddit post. The first answer and its top reply were very engaging:

It continues with the following:

Large jackpot winners face double-digit multiples of probability versus the general population to be the victim of:

1. Homicide (something like 20x more likely)
2. Drug overdose
3. Bankruptcy (how's that for irony?)
4. Kidnapping

And triple-digit multiples of probability versus the general population rate to be:

1. Convicted of drunk driving
2. The victim of Homicide (at the hands of a family member) 120x more likely in this case; ain't love grand?
3. A defendant in a civil lawsuit
4. A defendant in felony criminal proceedings

Believe it or not, your biggest enemy if you suddenly become possessed of large sums of money is... you.

In this post, I'm summarizing the 3,500-word comment. If you have time, the original comment is at the bottom of the post. In general, it covers the following seven topics:

1. First Call to a Tax Attorney

"Do NOT use your local attorney. Yes, I mean your long-standing family attorney who did your mother's will."

Winning the lottery is a dream come true, but it also comes with complex tax implications. Hiring a tax attorney should be your first priority. They'll guide you through the process, help manage potential legal issues, and ensure that you maintain the maximum amount of your winnings. "Get a partner from a larger NATIONAL firm. Don't let them pawn off junior partners or associates on you." Also, keep your mouth shut. Don't tell anyone – not your friends, not your coworkers.

Key Takeaways:

1. An experienced tax attorney can navigate complex tax laws and protect your assets.
2. Always seek professional advice before making any financial decisions.
3. Winning the lottery doesn't mean you have to broadcast it. Secrecy is your friend.

2. Annuity or Lump Sum: The Big Decision

"Most of them regret taking the lump sum."

Choosing between the annuity and the lump sum is one of the most significant decisions you'll make after winning the lottery. The lump sum can lead to rash spending and potential financial disaster, while the annuity provides a steady, long-term income.

Key Takeaways:

1. The lump sum can be risky due to potential overspending.
2. The annuity option provides a steady, long-term income.
3. The decision should be based on your financial discipline and investment acumen.

Example: If you're worried about handling a sudden influx of wealth, choosing the annuity option can be like getting a regular paycheck, helping you manage your money better, and potentially providing more financial stability.

3. Generosity without Chaos: Giving to Family and Friends

"20% of $114 million is $22.8 million. That leaves you with $91.2 million."

Sharing your winnings with family and friends is a noble act but one that needs careful planning. Establishing a trust can help you distribute wealth without creating family disputes or inadvertently turning your loved ones into spendthrifts. The post suggests a figure of around 20%. What’s striking here is the advice to set up trusts instead of giving out cash. This approach not only safeguards money but also protects relationships from the strain that money can introduce. As the post humorously warns: "You need never have trouble sleeping because you didn't lend Uncle Jerry $20,000 in small denomination unmarked bills to start his chain of deep-fried peanut butter pancake restaurants."

Key Takeaways:

1. Decide on a fixed percentage of your winnings to share with family and friends.
2. Set up trusts to distribute this wealth wisely and prevent family disputes.
3. Avoid giving out cash or extravagant gifts directly.

Example: Say you decide to share 20% of your winnings. Instead of giving out cash directly, you could set up a trust that supports their education, home purchases, and other major life events. This way, you're supporting your loved ones without encouraging reckless spending.

4. Navigating the Investment Manager Maze

"Investment managers charge fees, usually a percentage of assets."

Against conventional wisdom, the post recommends not hiring an investment manager, no matter how persuasive or compelling their PowerPoint presentations may be. Instead, it advocates for low-risk investments like an index fund. The post emphasizes that you're not going to double your money and to cool it – advice that seems prudent in light of the statistic from the Certified Financial Planner Board of Standards that nearly a third of lottery winners declare bankruptcy. While investment managers might come with glowing recommendations and promises of high returns, remember that they also charge significant fees. Opting for low-fee index funds can often provide better returns and fewer headaches.

Key Takeaways:

1. Investment managers often charge high fees, which can erode your returns.
2. It's not guaranteed that they can beat the market consistently.
3. Low-cost index funds are often a safer and more profitable choice.
4. Keep your investments simple, and remember: if it sounds too good to be true, it probably is.

Example: An investment manager who charges a 1% fee would need to outperform the market by 1% every year just to break even. On the other hand, a low-fee S&P 500 index fund could provide a steady return of around 7% over the long term without the need for any fancy financial footwork.

5. Creating a Financial Safety Net

"This is your safety net. You will be protected... from yourself."

Next, the post suggests using a significant chunk of your winnings to purchase longer-term U.S. treasuries or similar instruments from other G7 countries. This step creates a safety net that protects you from the temptation of risky investments or the potential of going "broke." Remember the case of Jack Whittaker, a lottery winner who won a massive $314 million but ended up losing it all due to reckless spending and poor investment choices:

Jack Whittaker, a successful businessman, won a $315 million lottery jackpot in 2002, which instead of joy, brought a series of misfortunes. The windfall attracted unwanted attention from financial stalkers, led to scrutiny of his character, and even resulted in multiple settlements related to ruined marriages. Despite his philanthropic efforts, Whittaker's generosity was met with skepticism. His family endured tragedies, including the death of his granddaughter. Legal troubles escalated, his marriage ended in divorce, and his assets were frozen, leading to a lawsuit from a casino. Today, Whittaker faces severe debt and potential bankruptcy, showcasing the potential downsides of sudden wealth.

It's important to set aside a portion of your winnings as a safety net for future financial security. This is your shield against economic downturns, personal emergencies, or any other unforeseen events that could negatively impact your financial status.

Key Takeaways:

1. Establish a safety net early on. It's not the most glamorous step, but it might be one of the most important.
2. This 'safety net' can protect you against unforeseen financial emergencies.
3. Prudent financial management is crucial, even when you've won the lottery.

Example: Let's say you win $114 million. A sensible move could be to set aside, say, 30% ($34.2 million) of your winnings. This money can be invested in a low-risk portfolio that could provide a steady income for years to come, ensuring you're financially secure, no matter what.

6. Invest in a Boring S&P 500 Index Fund

"Even if you lose every other dime, you have $638,400 per year you didn't have before that will keep coming in until the United States falls into chaos."

The sixth step advises putting 50% of the remaining 80% of your winnings, or $36.4 million, into a low-fee S&P 500 index fund. It warns against the temptation of hiring expensive financial advisers, emphasizing the idea of simplicity and reliability. The money invested in this way, untouched for 10 to 20 years, should experience growth—potentially turning $36.4 million into $115 million in two decades.

Key Takeaways:

1. Resist the temptation of hiring expensive financial advisors.
2. Consider investing half of your remaining winnings into a low-fee S&P 500 index fund.
3. Patience is key—let your money grow untouched for 10 to 20 years.
4. Embrace boring investments. They're not as exciting as buying a yacht, but they're a lot less likely to sink.

Example: Warren Buffet's investment strategy aligns with the advice given in this Reddit post - investing in an S&P 500 index fund for stable, long-term gains.

7. The Final Advice: Enjoy Your Fortune

Play. Have fun. You earned it by putting together the shoe sizes of your whole family on one ticket and winning the jackpot.

With all safety nets in place, in this example, you find yourself with $36.4 million in cash and a yearly income of $638,400. At this point, the post encourages you to do whatever you desire with your remaining fortune. You're advised to make prudent investments, like funding startups or buying valuable properties. However, the key rule is not to mix friendships and finances. Remember, it's not just about the money but about the freedom and opportunities it brings.

Key Takeaways:

1. Enjoy the financial security that comes with careful planning.
2. Invest wisely and avoid mixing friendships with financial decisions.
3. Use your wealth to enjoy life, remembering that you've earned this fortune.

Closing

A lottery win, like any great fortune, is not just about the sudden influx of cash—it's about the mindset. It's about making a responsible plan and sticking to it. It's about recognizing that with great wealth comes great responsibility—not just to yourself but to your family and society.

If you won the lottery, what would you do?

This post was inspired by the Reddit thread below: