Monday, April 25, 2016

Research Shows Lottery Winners Often End Up Bankrupt

How is it possible for people to blow through millions, or even billions of dollars?

It is counterintuitive that people who win the lottery or inherit tremendous amounts of money will end up bankrupt and yet, according to research studies, that is precisely what frequently occurs. When people win the lottery, their lives are changed forever, and often not for the better. Once the initial exhilaration wears off, typically within a few months, a new reality sets in and it is one that can be difficult to adjust to and manage.

Although the odds of winning the lottery are, as we're all well aware, extremely slim (something around 1 in 292 million), there are lessons to be learned from those who handle sudden wealth badly and suffer the consequences.  Some problems associated with acquiring sudden wealth, whether through winning the lottery or by other means, may be unpreparedness and susceptibility. For those who have been living on tight budgets, sudden wealth has a dreamlike quality that does not inspire prudent behavior.

Negatives Aspects of Suddenly Becoming Wealthy

 In addition to becoming prey to a barrage of media attention, instant millionaires or billionaires have to suddenly deal with scads of solicitations from:

  • Investment firms
  • Charitable organizations
  • Political organizations
  • Self-proclaimed and actual friends who need money
  • Scam artists who want to cash in

The pressure to make immediate decisions can quickly sour the original celebration of newfound wealth. On a psychological level such pressure often fosters suspicion and mistrust, and sometimes even paranoia and depression.

Lottery Winners Don't Receive as Much as They Think They Will

While for the vast majority of Americans, even the smaller pot seems tremendous, winners of, for example, $1.5 billion actually receive about $930 million if they take a lump sum payment. Then there is a big tax bite. Forbes estimates that the winner of $1.5 billion actually comes away with half a billion. Although by no means a pittance, it is a third of the stated amount.

How do those who receive windfalls typically behave?

Studies have shown that even people who receive small windfalls typically spend them almost immediately during the honeymoon phase of surprise "winnings." A paper published in 2001 by two noted economists and a well-known statistician found that lottery winners saved only 16 cents of every newfound dollar. Other studies demonstrate that, far from being their salvation, lottery winnings were often the downfall of those who claimed them. Astonishingly, bankruptcy rates soared for lottery winners in the 3 to 5 years after they won their prize. The problem does not appear to be linked to the lottery anymore than it is to a large inheritance or financial gift. Time and again, those who suddenly come into a large amount of money, especially those aged between 20 and 50, quickly lose half of that money to poor investments.

Distinguishing Spending from Investing

If a lottery winner, or anyone else, spends a great deal on real estate or artwork, assuming prices for such purchases rise or remain the same, that person hasn't lost anything. If, however, he or she invests in a stock which tanks, the investor has lost original assets. If the person buys property that decreases in value, lends sums that are not paid back, or spends huge sums on travel and lavish parties, the original amount diminishes. This is what is known as "blowing" the money, since the buyer has nothing to show for his or her spending.

Of course, there are even worse scenarios, in which the lottery winner spends money on gambling, illicit drugs, or other illegal activities and winds up not only bankrupt but in jail. Unfortunately, for those who do not invest wisely, do not save, and do not resist the temptation to spend with wild abandon, it is all too easy to fall into personal bankruptcy.

Whether you win the lottery, inherit a large sum, or have simply accumulated a sizeable amount of wealth, you should be careful to protect your assets for your own lifetime and for that of your heirs. Wisdom dictates that you contact an experienced and highly competent estate planning attorney to assist you in preserving your wealth.

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