At some point, we've all fantasized about winning the lottery and living the high life, replete with mansions, sports cars, yachts and exotic travel. But the reality of hitting the jackpot isn't some glamorous Kardashian-style existence.
Instead of finding themselves in the lap of luxury, 70 percent of people who come into sudden money are broke within a few years, according to the National Endowment for Financial Education. Many even end up cursing their windfalls.
The reason, said Susan Bradley, founder of the Sudden Money Institute, is that people get used to their own level of wealth. Suddenly they don't have the same limitations they had before, but many don't realize they still do have limitations.
And it doesn't take a Mega-Millions win to throw someone into monetary chaos.
"We define sudden money as having more money than you're used to dealing with," said Bradley, who trains financial professionals in how to help people transition through a windfall. "It's enough money that it has the potential to rock your world."
For some people, $100,000 would do it; for others, a couple of million plunges them into sudden wealth.
Lotteries are the rare path to sudden money. More likely is an inheritance, a lawsuit, a pension payout or the sale of a business. Celebrities and Major League athletes face this, too, when they hit it big. No matter the source, having to figure out how to live with money takes skill.
Candace Bahr, co-founder of Bahr Investment Group, tells of a client who got a $4 million settlement after an airplane crashed into her home, killing her husband and one of their four children. Before the lawsuit, the woman had been a housekeeper and lived modestly.
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Afterward her spending had no limits, especially when it came to providing for the surviving children. "She wanted to provide for them because they were traumatized," Bahr said.
Within months the windfall was reduced to $1 million, and that's when Bahr stepped in to put some stopgap measures in place, such as advising her client to sell the expensive home she had recently bought. "It can look like that bucket doesn't have a bottom, but it does," she said.
Most people want to start spending their money right away, and their list of desires is long. Delaying major life-altering decisions, such as moving or quitting a job, can put the brakes on impulsive behaviors.
"Use the decision-free zone to sort and organize," Bradley said.
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Robert Pagliarini, a certified financial planner whose firm, Pacifica Wealth Advisors, specializes in serving clients experiencing a windfall, also cautions against too many big decisions.
The author of "The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth," Pagliarini also has a master's degree in clinical psychology and explained that sudden money often leads to depression.
"We take ourselves from what feels comfortable … and put ourselves in a brand-new environment," he said. By moving, people leave their communities and join ones where they are not yet rooted. Taking up expensive hobbies like travel means less-well-off friends can't participate.
"It's really hard to keep those relationships," Pagliarini said.
Family and friends may also come out of the woodwork asking for a share of the windfall. A decision-free zone provides an inoffensive way to tell them you're not making any financial commitments just yet.
The flip side of acting impulsively is not acting at all. There's a downside to that, too.
When a client of financial advisor Jonathan Wolff inherited $10 million from her parents, she was paralyzed. "It became such a burden that it shut her down," said Wolff, president and founder of Lightship Wealth Strategies. She left the money in a money market account.
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Finally, Wolff said he couldn't work with her; he couldn't charge her a management fee to keep the money in cash. "And family members asking her for money made it even worse."
Eventually, decisions do need to be made. "If you can't make decisions, then get the right help," Pagliarini at Pacifica advised.
To make sure all bases are covered, sudden-money recipients need a team of professionals. The team should include a tax expert, a lawyer and an investment person.
Trust and estate lawyers, depending on the state they're licensed in, might be able to keep the name of a recipient of a large cash settlement or prize private. And they can help create appropriate trusts to give money to family and friends.
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Certified public accountants can help minimize taxes due on windfalls, by advising how to take a payout. For example, a $10 million settlement would be taxable at the highest rate if it is taken as a lump sum. But a structured settlement that spreads the payments out over 30 years can substantially lower the tax rate, because each year's income puts the recipient in a lower tax bracket.
The same goes for lottery winnings.
Taking the lump sum incurs a penalty and high taxes. But the annuity option has no penalty, and taxes might be lower, too.
"If you've won $1 million, you're going to pay $500,000 in taxes," Pagliarini said. "But if you take the annuity that pays you $75,000 over the course of 20 years, you may not owe any tax."
An investment professional, meanwhile, can help windfall recipients create an income stream that won't be depleted or mismanaged.
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Bradley at the Sudden Money Institute adds that the team should also include a person who understands financial transitions and can coordinate all the parties.
In fact, someone who understands just how unsettling the transition to greater wealth can be is of even more value to a newly enriched person than an investing ace would be, she noted.
"When money changes, life changes," Bradley said.