How to Go from $5.5 Million to Living on a Pension

Here's an unfortunately oft-repeated story of a guy who won big in the lottery, trusted the wrong people, and lost it all (or at least most of it.) The short story:

• Guy wins $5.5 million in the lottery
• Guy mismanages it (or has it mismanaged for him)
• Guy is now living a dramatically reduced lifestyle

An overview:

His fiscal downfall followed what has emerged as something of a pattern among lottery winners nationally: Someone with little training in dealing with vast sums of money gets a sudden windfall, only to see it tumble maddeningly into the wind.

Here's the most ominous quote in the piece:

"The only thing he did that you could even say is wrong is he trusted his financial advisers."

He cashed out his winnings into $2 million (by taking a lump sum payout) and then proceeded to have it lost for him:

The court and financial-arbitration filings tell the story in flat terms, claiming Cicero lost $600,000 or more in bad investments. And he ended up paying $240,000 more to the IRS for penalties and interest after he learned the hard way that a lump-sum lottery buyout doesn't count as capital-gains income. There was also a divorce.

He still has enough to live on, but he's not living the high life that it once seemed he was destined to lead.

So what does this have to do with you? Well, you may not be a multi-million-dollar lottery winner, but that doesn't mean your money isn't important to you. It doesn't mean that a dishonest financial advisor won't try to lead you down the wrong path and lose $10,000, $25,000, or $50,000 of your money -- amounts that are pretty significant to most people. But that's the path you're on if you don't: 1) at least learn the basics of personal finances so you know if someone's snowing you and 2) don't do your due diligence before hiring any financial planner.

No, you may not have millions to lose, but your money is important to you. Please educate yourself on how to handle it and be careful before you trust anyone to manage it. There are a lot of people out there looking to make your money their money.

For more thoughts on financial planners, see these links:

• Why Your Planner Wants You in Debt

• Shocker: Many Brokers Give Bad Advice

• Thoughts on Financial Advisors

Comments

[Andrew]

I never understood these people, but then again, people are pretty dumb in general.

Why take the lump sum payout? You can't live on $98K a year? My god. And he lives in Wisconsin, not New York, so the cost of living isn't -that- bad.

[cory]

That's actually 98k/yr PLUS a pension, with increases to the prize payout yearly. So we're talking a 6-figure salary for a retiree here.

"But by 2000, he decided on a different approach: sell the future annual payments off to a private firm for an immediate lump sum - in his case, about $2 million - that he could roll into investments. He'd just live off the earnings and interest."

Just live off the earnings and interest. Instead of collecting 100k/yr for doing nothing. Great move!

[Brad]

Don't know the legalities of everything but the guy is 72. Got $2 million, would have taken 21 years to get the same amount, he was bought out for, back. If you go with the statistics, not a bad deal because he's probably not going to live that long. Enjoy the money and set the kids up for life, but gets some bad advice and loses ALOT of money. Just shortened his life because of all the heartache he is enduring from the trials that the investment group can probably prolong until he does pass away. Not leaving his family any inheritance because he will probably use all his pension in legal fees, unless it's all or none for the attorneys. Was it really worth it?

[Chris]

What a sad story. He wins the lottery, then his advisers lose his money, more advisers cost him money in tax errors, and this 72 year old man...down on his luck, and his wife up and leaves him in the middle of it?

This poor guy.

[MoleOnABull]

Easy come easy go?

Yep.

Not always, but most of the time the case.

[Interloper]

This reminds me of Luke 16:10: "He who is faithful in what is least is faithful also in much; and he who is unjust in what is least is unjust also in much."

The definite trend for lottery winners seems to be euphoria followed by heartache and loss, often finishing worse off than before (see http://www.cbsnews.com/stories/2004/12/20/national/main662123.shtml). Maybe playing the lottery is, a posteriori, evidence of unfaithfulness with money.

[Q at $1 Million to My Name]

Always take the lump sum payout! It's then up to you to manage it properly.

I can assure you, I would be soooo good at handling lottery winnings. Just when is this going to happen for me? :)

A lottery winner with $2 million in winnings always acts differently than the hard worker that accumulates $2 million. The reason behind that is most fascinating.

[Blaine Moore (First Time Home Owner)]

I win the lottery every day. I don't play it. The lottery is a sucker's game.

[John Wilks]

Great comment Blaine Moore. I also dont gamble. Instead I "invest" that money in school and other things that almost certainly pay dividends.

-Wilks