Whether you win the lottery, a long-lost relative leaves you their entire fortune, or you dig up a bag of gold and jewels in your backyard while planting a hydrangea bush, your life is about to change. But it may not be for the better. Everything depends on the steps you take next.
And if you're advising a client who just received a life-changing financial windfall, you need to make sure you're steering them in the right direction.
In this episode of BIF Bites, Jerry is walking you through what you need to know for you or your client, from staying grounded to making smart, long-term decisions.
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Click Below to Read Full Transcript
00:00:04 Jerry Mee
Hello everyone and welcome back to another awesome episode of the BIF Bites Podcast. I’m your host, Jerry Mee, and we are in the first week of September. You know what that means — we are kicking off the November CFP exam cycle. We just had our first week of classes with the BIF Review and we have a whole slew of podcast episodes planned out for you over the next couple of months, all designed to help you pass the CFP exam.
But before we dive into the details of the CFP curriculum, I wanted to take this opportunity to have one last fun episode of the season. What better topic to cover than the item dominating the news — the massive Powerball jackpot, which as of this recording is at 1.7 billion dollars. Winning a windfall like that comes with a massive pile of financial planning work, so I thought it would be great to walk through a playbook of what to do if you happen to be lucky enough to win that Powerball lottery.
Or, if one of your clients wins it — or really, anytime a client comes into a large, unexpected sum of money, whether through a lottery, gambling winnings, or more commonly, a large inheritance. So, without further ado, let’s dive into the first big decision: whether to take the winnings as a lump sum or as a 30-year annuity.
00:02:03 Jerry Mee
The Powerball, like most lotteries, gives you the option of either a 30-year annuity (which is what the 1.7 billion headline number is based on) or a much smaller lump sum payout. You don’t actually get 1.7 billion upfront — that’s the total annuity value. The lump sum in this case is about 756 million. It’s a billion less, but still, I think we can manage.
Unfortunately, that’s not where the deductions stop because we also have to pay taxes. Good old Uncle Sam always wants his cut. If you’re winning that much, you’re going to be in the highest tax bracket automatically. After 37 percent going to taxes, that lump sum of 756 million gets whittled down to roughly 476 million. A far cry from 1.7 billion, but still — I’ll take it.
If you choose the annuity, you’ll receive 30 years of payments of about 57 million per year. After taxes, that’s around 36 million annually. So the real decision is between a 476 million lump sum or 30 years of 36 million per year.
00:04:48 Jerry Mee
To figure out which option is better, we can use a financial calculator, a tool that comes up often on the CFP exam. The problem mirrors exam questions where clients must choose between a lump sum or a payment stream, such as a court settlement or structured payout.
The lump sum’s present value is clear — 476 million today. To find the present value of the annuity, we input 36 million as the payment (PMT), 30 as the number of years (N), and assume a reasonable discount rate — say, 7 percent, the standard rate used in most financial models. Hitting PV gives us a present value of about 481 million.
That’s slightly higher than the lump sum, by about 5 million. So, technically, the annuity is the better mathematical choice. But when we’re talking about hundreds of millions, the difference is negligible. At this point, it becomes less about math and more about behavioral finance.
00:07:58 Jerry Mee
Behavioral finance tells us that about one-third of massive lottery winners end up bankrupt within a few years. Some studies even suggest the number is closer to 70 percent. Managing that much money is a shock to the system, especially for people without financial literacy. Many overspend, mismanage, and lose it all.
For that reason, the annuity might be a better option for those who struggle with discipline. You can’t blow all your money at once if you don’t have access to it all at once. With annual payments, the worst you can do is spend a year’s worth — and then you get a reset next year. For individuals with poor money habits, the annuity option offers built-in protection.
00:10:36 Jerry Mee
Now, on the flip side, there are reasons to favor the lump sum, especially when you consider future taxes. Right now, we’re in a historically low tax environment. The top bracket of 37 percent might sound high, but in the past, rates reached as high as 70 or 80 percent. If taxes rise in the future, taking the annuity could mean paying more each year. That tips the scales toward taking the lump sum while rates are low.
Another argument for the lump sum is control. You get the money upfront and don’t have to worry about what happens decades down the road. Life is unpredictable. You could enjoy your money now and make investments that align with your goals. If you’re financially savvy and can manage your wealth responsibly, the lump sum is likely the better option.
Also, if you believe you can earn a higher rate of return than 7 percent — say 10, 12, or even 15 percent — the lump sum becomes even more appealing. The key is consistency and control.
00:13:44 Jerry Mee
Once you’ve decided between the lump sum and annuity, the next question is what to do with the money. Simply parking it in a savings account won’t cut it. Not only would you miss out on growth, but FDIC insurance only covers up to $250,000 per account. You’d need to spread your assets across multiple institutions or, better yet, diversify into different investment types altogether.
Diversification becomes even more important when dealing with this much money. Real estate is a popular choice — it’s tangible, offers tax advantages, and tends to be stable compared to equities or bonds. Many of the world’s wealthiest individuals hold significant portions of their portfolios in real estate.
00:16:47 Jerry Mee
Along with investment strategy, estate planning becomes crucial. Even with the lifetime estate tax exclusion near 14 million, a Powerball winner will exceed that threshold easily. Estate planning ensures your wealth passes smoothly, minimizes taxes, and prevents family conflict.
Money can tear families apart. Resentment and disputes over inheritance are common, especially when there’s no clear plan. Work with a qualified estate attorney to establish trusts, clarify beneficiaries, and prepare for estate taxes.
High-profile cases like Michael Jackson’s estate show how chaos and taxes can destroy wealth when proper planning isn’t in place. Set up family trusts, A/B trusts, and other tools to protect assets and minimize tax exposure.
00:19:44 Jerry Mee
That does it for this episode. There are plenty of other angles we could explore, but we’re out of time for today. I hope you enjoyed this fun thought experiment — and if any of you listeners actually win that 1.7 billion Powerball, remember your friends here at the BIF Crew when you’re feeling generous. That’s it for today. I’ll see you all next time.
