Winning the lotto means responsibility

Winning the lotto

Winning the lotto comes with responsibility

Over the last few weeks there have been many people winning the lotto. A lot of them won big. Two lucky people shared a jackpot of nearly R60m. I have met a few lotto winners over the years and most of them have sad stories to tell about their “good fortune”.

In the USA, nearly 70% of the people winning the lotto are broke within seven years. I expect South Africans winning the lotto have the same experience. Sadly, there are real risks involved in winning the lotto. Suicides, murders, drug addiction and divorces are common themes in the stories of these previously ordinary people whose lives were ruined by a big jackpot. My first piece of advice to a big winner is: DON’T TELL PEOPLE.

Take things slowly

Take two or three months after winning the lotto to think about what you are going to do before you do anything with your winnings. If possible speak to people who are wealthy and find out how they live their lives. You can learn a lot from other people’s experiences. Don’t repeat their mistakes. Get used to the idea of being wealthy and try to plan your life ahead before you start splurging. Don’t quit your job immediately, as this is a sure sign to all your friends and family that your life has changed. If you really hate your job or your boss, try to develop a plan for what you are going to do with your time before telling the boss where to stick it. It will seem strange to most. But the combination of real wealth and boredom is very dangerous. Remember, there is no rush to do anything with your money. It’s not going to disappear if you take a few months to start making investment decisions.

Stick to things you know

The fact that you have been lucky enough after winning the lotto does not mean you have suddenly become an expert investor or business owner. When you have large sums to invest, it will not take long for people to offer you opportunities to buy into private businesses, buildings or property developments. These are the situations where you should exercise extreme caution. If you are interested in becoming an entrepreneur, make use of experts who are paid to recommend you properly, rather than commission earning agents who want to sell you something. More importantly, take all the time necessary to arm yourself with information so that you can protect yourself from bad investment decisions after winning the lotto.

Your action plan

I realise that after winning the lotto, it will be impossible to convince you not to spend some of it. Give yourself a spending budget For example, if you won R50m, you could allocate R10m to discretionary spending. Here are some sensible examples of how to spend this money:

  • Pay off all debt, including home loans
  • Pay off debts for children or parents. If you want to share your good fortune with them
  • Buy another home, if desired
  • Buy assets that have a long history of appreciating in value

After winning the lotto, try not to:

  • Spend millions on expensive cars. These will cost a fortune to insure and will lose value rapidly
  • Donate lump sums to family and friends. Rather give them a source of monthly income that continues for the rest of their lives. History has repeatedly shown that very few people can handle the swift transition from relative poverty to instant wealth.

Create a cash safety net

Set up an emergency fund that equates to six months’ of expenses. This should be used to cover unforeseen expenses only.

Create an income generating income base

If you want to make sure you can live off your remaining capital for the rest of your life, you will need to invest it so that you can earn a sustainable income from your capital. This income will need to increase with inflation. You must be careful about how much you spend, relative to the value of your remaining assets. Try to draw a maximum of 4% per year from your capital (e.g. 4% of R40m), as an annual income. If your capital is invested in a diversified portfolio of shares, bonds and property, it should continue to grow by more than inflation even after the effect of your income withdrawals. You should invest a minimum of 60% of your capital in productive assets, such as shares and commercial or listed property.

An annual income of 4% of R40m equates to R133 333 per month. From this money you will need to pay income tax and give to any friends, family and charities. Don’t plan to spend it all on yourself. Try to draw a smaller percentage in the beginning. This gradually gets you used to your new lifestyle.

Get an estate plan

There are many examples of people winning the lotto being knocked off by family members who wanted their share of the pie. This may sound like the plot of a bad movie but this has happened on many occasions in the past. In order to prevent this temptation, make sure you have a proper will that specifies where the money will go on your death. I would also seriously consider starting a trust. If on your death, your assets are left to a trust managed by independent trustees, there is little point in crazy relatives ending your life prematurely… There will also be little chance for them to squabble over your money, such as the greedy grandchildren of a certain famous man we all love.

If you feel the burden of managing this money is too much to deal with, you can consider placing the money in a trust immediately. Then appoint professional independent trustees to look after your interests for you. This is an option used by many very wealthy people around the world. Just make sure you have the right mix of trustees, who are paid in the right way. As an example, I prefer one accountant, one lawyer and one independent investment expert. More importantly, all of them are paid a fixed monthly fee and they cannot earn any money directly or indirectly from the capital of the trust. This tends to keep everyone honest and focussed on their jobs.

Summary

I believe it is nearly impossible for people to adapt to becoming instantly wealthy after winning the lotto. Especially those who have not had much experience with wealth. Those who are best able to cope are usually not motivated by material wealth. I think our lotto must follow the American example. Winners are not given all the money at once. They are paid an annual amount for a long period. For example, if you win a R50m lotto, you are paid R1m per year for 50 years. This gives you time to get used to the idea of being wealthy and limits your ability to make catastrophic mistakes with all your wealth.

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