Collecting a lottery prize in a lump sum could lead to ruin in less than 5 years, says expert
A personal finance expert explains why it is better to choose to collect a lottery prize in annuities and the reason why most of them end up in ruin.
Generally, any lottery that usually grants its players significant prizes, gives 2 options to collect them: to receive a single payment or to distribute the money in installments or annuities.
Usually, the winners of a millionaire lottery prize usually opt for the first option, that is, claiming a single payment, since many wish to have all the money in their hands to execute all the plans they have in mind, something that could be “very dangerous”, according to an expert on this subject.
In an interview for Univision 41, William Romero, who is a financial advisor, assured that the majority of lottery winners who decide to opt to receive their prize in a single exhibition, usually end up bankrupt in less than 5 years.
“Statistically, 90% of winners choose to pay up front (in one lump sum). Unfortunately, 70% of those who choose this method go bankrupt within 3 to 5 years,” commented Romero.
The financial advisor pointed out that this is mainly due to the fact that the winners are not psychologically prepared to have a lot of money in their hands, and above all, because they do not know how to manage it, since they tend to make luxurious expenses, generally moved by their closest environment.
“Psychologically, when one receives a prize as big as $1 billion dollars, one does not take into account that one has to pay taxes, most of all, and one thinks that this money is going to last forever,” he emphasized.
That is why, in view of this situation, Romero recommends lottery winners to choose to collect their prize in annuities, since this gives them the opportunity to make a financial plan and distribute their expenses in a better way.
Also, if for some situation you spend all the money you get in the annuity, you will have other payments to come and avoid bankruptcy.
“By electing your payment annually, it gives you the opportunity, first of all, to lower your taxes annually at the federal level and at the state level, because one is going to pay less. Also, the payments are going to last you the rest of your life, so what happens. If you spent this year’s check, you will get another one next year and another one the following year, and so on,” added the financial expert.
To close, the specialist indicated that people who win a significant lottery prize should form a support team with accountants, financial advisors and lawyers, who will help them make the best decisions.
“Giving you the time to receive payments annually, gives you the opportunity to create a team of professionals, for example an accountant, a financial advisor and a lawyer who can consult you on issues such as taxes, how to protect that money and an accountant who will follow you specifically how much you have to put aside so that you have to pay taxes at the end of the year,” he said.