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  • Writer's pictureJill Schlesinger, CFP

Jill on money

Powerball lessons

courtesy photo

Powerball fever has broken. Someone in California won the jackpot, which was worth just over $1 billion, the third-largest prize in the lottery’s history.

In the days leading up to the drawing, there were plenty of articles recounting the terrible odds (1 in 292.2 million) of hitting the jackpot, but as the lottery operator likes to remind us, “The overall odds of winning a prize are 1 in 24.87.”

You might think that I am about to launch into a lecture about the ills of lotteries, but I assume you know that playing numbers, gambling, or day trading when you don’t know what you are doing or for anything other than a fun way to dream, can be detrimental to your financial and emotional life.

Instead, let’s use Powerball as a way to discuss some core investment and financial planning concepts.

You don’t need an unexpected windfall to be in the millions to prompt action. A surprisingly large bonus, an inheritance, or a bigger than expected sale price on a house or stock can be a catalyst to rethink where you are in your life.

Importantly, the new-found money may cause you to rethink previous decisions and alter your goals. Here are some of the specific steps that can help:

1. Draft your professional team: A windfall may mean that it’s time to interview estate attorneys, accountants, and financial advisors. If you are already working with any of these professionals, it may be worth considering whether you are with the right person/firm for your current situation.

2. Create/update your financial plan: According to the CFP Board, the planning process involves seven steps: Understanding personal and financial circumstances, identifying and selecting goals, analyzing the current course of action and potential alternative courses of action, developing recommendations, presenting those recommendations, implementing the plan, and monitoring/updating progress.

3. Consider taxes: Part of the planning process will incorporate taxes, but before your dreams take off, remember that Uncle Sam is often a partner in your windfall.

In fact, the recent $1 billion Powerball headline number is pre-tax. If the winner chooses a lump sum (more on that below), the amount would be about $558 million. The lottery operator withholds 24 percent, or about $134 million. Chances are, the winner will have to pay even more in taxes, because the windfall will mean that the top tax bracket of 37 percent will be applied and depending on the state of residence, there could also be state taxes.

Tax considerations are important in any transaction. For example, the sale of a primary residence may allow you to exclude up to $250,000 of a capital gain from your income, ($500,000 if filing jointly), but with the explosion of real estate prices in the past few years, many will find that they exceed that gain.

4. Determine whether you will take a lump sum or an annuity: The decision is one-part math and one-part emotional. Usually, a big chunk of cash invested over time will accumulate faster than smaller amounts invested at regular intervals. (This is a good thing to keep in mind when you are considering whether to pull the trigger with money on the sidelines or dollar cost averaging.)

Additionally, while 37 percent sounds like a high bracket, by choosing a lump sum, you are locking in your tax liability at historically low tax rates.

But receiving money all at once risks blowing some or all of it by doing dumb things, like investing in your cousin’s hair-brained business idea or buying too much, too fast.

The stream of income ensures that you won’t plow through your jackpot, which may make an annuity the better option for some winners.

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at Check her website at ©2023 Tribune Content Agency, LLC


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