FA Playbook

Powerball, Mega Millions jackpots now total $752 million. How to make a spending plan if you win big

Key Points
  • The $282 million Powerball jackpot comes with a lump sum cash option of $161.1 million. For the $470 million Mega Millions jackpot, it's $265 million.
  • Experts say that while it's OK to splurge on yourself or family friends right off the bat, it's also important to establish boundaries for your spending right away.
  • Generally speaking, withdrawing no more than 4 percent of your money each year would ensure it lasts for at least several decades.
Justin Sullivan | Getty Images

Good news: No one hit all winning numbers in Saturday night's Powerball drawing. Even better news: The jackpot amount has jumped to $282 million.

Between that purse and a $470 million Mega Million haul, a whopping $752 million is up for grabs in the next drawings. That will be on Tuesday night for Mega Millions and Wednesday night for Powerball.

If you're lucky enough to win either sum, you might think of it as enough money to spend lavishly on whatever you want, for as long as you want.

Guess again.

How the GOP tax plan could affect a Powerball or Mega Millions win
How the GOP tax plan could affect a Powerball or Mega Millions win

For starters, the advertised amount is not what winners end up with. Taxes take a big bite out of the windfall, and protecting the remainder involves planning how much to save and how much to spend.

While the specifics of those decisions are best made with the guidance of experienced experts, here are the basics that you'll have to consider.

Paying Uncle Sam

Whether you choose to take your winnings as a lump sum or as an annuity spread over 30 years, the IRS will shave off 24 percent of your winnings before it even gets to you.

For the $470 million Mega Millions jackpot, the immediate cash option is $265 million. For the $282 million Powerball jackpot, it's $161.1 million.

The 24 percent federal tax withholding would reduce Mega Millions' cash option by about $63.6 million, to $201.4 million, and Powerball's by $38.7 million, to $122.4 million. You also should anticipate owing more to Uncle Sam at tax time.

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On top of the IRS withholding, you'll pay state taxes on the money, unless you live in a state where lottery wins are untaxed. For states that take a piece (and most certainly do), the rate ranges from a high of 8.82 percent in New York to a low of 2.9 percent in North Dakota, according to lottery site USAMega.com.

If you suddenly become one of the One Percent, minimizing your tax burden will likely become one of your financial priorities. Make sure that when you turn to experts for help, your team includes a tax advisor and financial planner, along with an attorney experienced in helping lottery winners (this should be your first call).

Immediate spending

Experts say it's OK to splurge on yourself upfront, whether it's for a new car, new house, overseas vacation or something else you've been coveting. The important thing is to set boundaries right away — even when the amount you win seems unlimited.

"It's important to set up a preliminary plan and budget right from the start," said Jason Kurland, a partner at Rivkin Radler, a law firm in Uniondale, New York. "Emotionally, having an initial structure in place is extremely helpful for winners, because this is such an overwhelming experience," said Kurland, who specializes in lottery winnings.

Also make sure that you set boundaries for family members and friends as well.

This is what you do if you win the lottery
This is what you do if you win the lottery

"It feels good to treat people to vacations and buy a house for Mom, but you don't want to do it to the point where it can damage your life goals," said certified financial planner Jim Shagawat, president of Windfall Wealth Advisors in Paramus, New Jersey. "When the gifting starts, it's difficult to stop."

One type of giving, though, can be useful to more than just the recipient. If you are charitably inclined, remember that donations are tax-deductible for people who itemize their deductions.

Setting up a charitable foundation or similar entity in the year you receive your jackpot winnings can help reduce your immediate tax burden. However, your own tax advisor can help navigate exactly how and when to approach your charitable giving.

Annual spending

One common way to help ensure your money lasts is the so-called 4 percent rule. That is, if you withdraw no more than 4 percent of your money each year, it should last at least several decades — as long as it's properly invested in a diversified portfolio, Shagawat said.

While that withdrawal rate sounds small, it's actually large when applied to the current Mega Millions and Powerball jackpots, even after the tax hit.

Basically, for every $100 million that a winner gets, the 4 percent rule would mean they could safely withdraw up to $4 million each year without running out of money for decades.

Of course, the amount that's right for you depends on your own goals for your newfound wealth.