Winning the lottery is a dream for many, offering the chance to become financially secure overnight. However, the reality is that winning the lottery does not guarantee long-term wealth or happiness. In fact, statistics show that a high percentage of lottery winners end up broke within just a few years of their big win. This article will examine what percent of lottery winners go broke, the common reasons why, and steps winners can take to avoid losing their windfall.
Key Statistics on Lottery Winners Going Broke
Several studies have looked at bankruptcy rates and other financial problems among lottery winners. Here are some key statistics:
- About 70% of people who suddenly receive a financial windfall, including lottery winners, go bankrupt within a few years, according to the National Endowment for Financial Education.
- A study by the University of Kentucky found that about 35% of lottery winners go bankrupt within 5 years.
- About one-third of multi-million dollar lottery winners eventually declare bankruptcy, according to research by the financial services company Certified Financial.
- A study published in The Journal of Behavioral Decision Making found that winning a lottery prize of $50,000 to $150,000 doubled bankruptcy rates over the next 5 years.
- Big lottery winners are more likely to go bankrupt within 3 to 5 years than the average American, according to multiple studies.
These statistics indicate that bankruptcy and financial problems are very common among lottery winners, even those who win sizable amounts worth hundreds of thousands or millions of dollars. While winning the lottery gives a financial head start, it does not guarantee financial success or security.
Common Reasons Lottery Winners Go Broke
Why do so many lottery winners end up losing their money and declaring bankruptcy? Here are some of the most common explanations:
Overspending and Mismanagement of Money
Coming into a sudden windfall can lead people to spend excessively and make poor financial decisions. Some winners make large impulse purchases like luxury cars, vacations, and homes. Others feel compelled to help out family and friends by showering them with gifts and loans. Without financial education and discipline, lottery winners can burn through even millions of dollars very quickly.
Debt Accumulation
Lottery winners sometimes use their new income to take on more debt through credit cards, personal loans, and extra mortgages. These debts then become burdensome if the winner’s finances take a turn for the worse. Winners may also accumulate debt by living beyond their means and taking on expenses they cannot afford over time.
Unwise Investments
Without investing knowledge, lottery winners are susceptible to making bad investment decisions that don’t pan out. Some entrepreneurs and investors approach recent winners to pitch proposals and get them involved in ventures that fail. Other winners may make speculative investments on their own that lose money.
Lawsuits and Divorces
The publicity around major lottery wins can attract lawsuits from strangers, friends, and even family members looking for a slice of the prize. The stress of winning can also negatively impact relationships and lead to marital problems or divorce. Financial settlements after lawsuits or divorces result in lottery winners losing chunks of their prize.
Costly Homes and Cars
It’s common for lottery winners to upgrade to luxury, customized homes and flagship vehicles like sports cars or SUVs. But buying, maintaining, and insuring very expensive homes and vehicles can rapidly eat through their newfound wealth. Property taxes and home repairs also add up for bigger homes.
Lack of Cash Flow Management
Some lottery winners receive their entire prize upfront in cash. But failing to set aside and invest part of the prize means they lose opportunities for their winnings to generate ongoing income. Winners without proper cash flow planning can see their prize gradually dwindle until nothing is left.
Predatory Lending
Lottery winners may be targeted by predatory lenders who charge very high interest rates and hidden fees. Without financial savvy, winners can get trapped repaying expensive loans that drain their wealth. Predatory lending to those with financial windfalls is an unfortunate issue that contributes to winners losing everything.
How Lottery Winners Can Avoid Going Broke
While coming into money can certainly present challenges, there are actions lottery winners can take to significantly increase their chances of remaining financially stable long-term:
Remain Anonymous
Where allowed, winners can claim their prize via trusts or other legal entities that keep their identity private. This helps shield them from harassment for money and reduce media attention on their winnings. It also keeps unwanted solicitations at bay.
Assemble a Team of Advisors
Every lottery winner needs a team that includes an attorney, a financial advisor, and a tax expert. These professionals help navigate critical decisions regarding claiming, investing, and allocating prize money. They provide guidance tailored to the winner’s specific situation and goals.
Pay Off Debts
One of the first steps winners should take is paying off any existing debts like credit cards, personal loans, and mortgages. This provides a clean slate and removes stress from ongoing debt payments. It also shows financial responsibility.
Set Aside For Taxes
Taxes represent a significant expense for lottery winners. Setting aside at least 30-40% of the prize for federal and state taxes right away prevents facing a big tax bill later without adequate funds.
Create a Budget
A thorough budget that accounts for any new income and expenses helps lottery winners manage their money responsibly. Sticking to the budget avoids overspending and allows winners to live within their means.
Invest for Long-Term Growth
Rather than spending their entire prize right away, winners should invest a large portion of it. Working with financial advisors helps identify prudent investments like mutual funds, bonds, stocks, and real estate that provide ongoing returns.
Save For the Future
Saving and investing a sizeable amount of lottery winnings ensures winners have a financial cushion for retirement and major future expenses like their children’s college education. Saving provides longevity to a lottery prize.
Live Below Your Means
Winners should aim to live below their means, spending only a modest portion of any prize money and investment returns. Maintaining a frugal lifestyle avoids draining their newfound wealth too quickly.
Avoid Temptation to Overspend
It’s easy to want to purchase expensive items and gifts for others with sudden lottery fortunes. But winners should resist temptations to overspend and splurge right away. Carefully considered purchases preserve capital.
Don’t Go Overboard Supporting Others
A modest amount of philanthropy is reasonable, but winners shouldn’t feel pressured provide large handouts to family and friends. Some gifts to close loved ones are OK but anything excessive can threaten winners’ long-term finances.
Seek Continued Education
Learning more about money management, budgeting, taxes, and investing helps lottery winners make the most of their windfall. Continually expanding their financial knowledge aids in wise decision making.
Key Factors That Reduce Bankruptcy Risk
Research has uncovered several success factors that make a lottery winner less likely to go bankrupt:
- Remaining anonymous – Winners whose identity remains secret are less likely to face lawsuits, solicitations, family requests, or media scrutiny.
- Paying off debts – Eliminating debts, especially large ones, reduces financial risk and eases cash flow.
- Modest lifestyle – Winners who make only modest changes to their lifestyle are less likely to overspend.
- Disciplined budgeting – Closely budgeting and tracking all income and expenses helps winners spend responsibly.
- Conservative investments – Sticking to slow-growth investments with little downside risk preserves capital.
- Ongoing work – Many winners who keep working and contributing to savings maintain financial discipline.
- Professional advice – Winners who employ financial advisors and listen to their guidance tend to fare better.
Lottery winners who exhibit these behaviors and approaches tend to successfully manage their windfall and avoid going broke.
Interesting Case Studies of Lottery Winners
Looking at real-world examples provides helpful insight into how lottery fortunes can be managed:
Neil Trotter
Neil Trotter won nearly $13 million playing the Euromillions lottery in the UK in 2014. Despite winning one of the largest prizes in UK history, Trotter maintained a relatively modest middle-class lifestyle. He purchased a nice new home but kept driving his old Honda and returned to work as a mechanic at the same shop. Trotter credits keeping a low profile and sticking to a budget for maintaining his windfall. Eight years after his big win, he is still financially secure.
Evelyn Adams
In contrast, Evelyn Adams serves as a cautionary tale of squandering a lottery fortune. She won the New Jersey lottery twice, in 1985 and 1986, collecting prizes worth a combined $5.4 million. However, she spent lavishly on big houses, cars, and vacations, as well as reportedly gambled and made unwise loans to others. Just a few years later, Adams had lost all her winnings, was deep in debt, and living in a trailer.
Suzanne Mullins
Suzanne Mullins won $4.2 million in the Virginia lottery in 1993. She opted for yearly payouts rather than a lump sum and immediately began using her new income responsibly. She paid cash for a modest new home, invested through an accountant, took vacations, and helped pay tuition for her grandchildren. Nearly 30 years later, Mullins is still living comfortably off her annual lottery payments.
William Post
William Post won $16.2 million in the Pennsylvania lottery in 1988. However, he quickly spent lavishly on two mansions, luxury vehicles, trips, and even a used helicopter. Within a year he was $1 million in debt. Post said he regretted winning the lottery and that it had instead ruined his life. The consequences for Post included divorce, a convicted former roommate plotting his death, and declaring bankruptcy in 1994.
These real-world cases reinforce that modesty, budgeting discipline, and financial responsibility are key to preserving a lottery fortune, while excess and poor money management often result in the prize being squandered.
Use of Annuities
Rather than taking a lump sum, lottery winners can choose to receive their prize through annuity payments distributed over 20 or more years. Annual payments provide a steady income stream and reduce the risk of overspending a large upfront sum.
Annuities do have drawbacks, including less flexibility and inability to access funds urgently. Plus, annual payments are subject to inflation erosion over time. But for winners lacking financial expertise, accepting annual installments helps guarantee the prize money lasts.
According to one study, lottery winners who opted for annuities had a much lower bankruptcy rate of just 3% compared to 30% for lump sum winners. While annuities limit use of funds, they are generally a safer approach for preserving longevity of a lottery fortune.
Psychological Challenges of Winning
Beyond financial risks, there are also psychological and social factors that contribute to lottery winners going broke. Sudden wealth can trigger feelings of guilt, anxiety, isolation, and fear of losing new gains. Most people are simply not emotionally ready to handle this abrupt life change.
Winning can also strain relationships with friends, family members, and spouses who may resent the money or have unrealistic expectations. These pressures take a psychological toll that can disrupt wise decision making.
Experts recommend lottery winners connect with therapists and other winners for emotional support. Counseling and peer advice helps winners navigate relationship issues and achieve mental well-being critical to financial stability.
Key Tips for Preserving a Lottery Fortune
Based on all the available research and real-world examples, here are the top pieces of advice for lottery winners to avoid going broke:
- Remain anonymous if permitted – This reduces outside appeals for money and unwanted public scrutiny.
- Immediately assemble a team of financial/legal experts – Let professionals guide major decisions.
- Pay off debts – Eliminate debt obligations ASAP.
- Create a modest budget – Make disciplined spending the cornerstone.
- Set aside 30-40% for taxes right away – Don’t get stuck with a big unforeseen tax bill.
- Invest conservatively – Take a slow growth approach to investing windfalls.
- Save and build an emergency fund – All winners need a financial cushion.
- Live below your means – Spend only a fraction of annual returns.
- Give moderately – It’s OK to help some loved ones, but set limits.
- Find balance and purpose – Maintain perspective and stay grounded.
Carefully following these tips maximizes the chances a lottery fortune retains its value over time rather than being squandered.
Helpful Resources for Lottery Winners
For further guidance, lottery winners can turn to many helpful books, articles, financial advisors, counselors, and other valuable resources:
- Money for the Rest of Us – Popular financial podcast with prudence tips.
- The Lottery Wars – Book examining tragedy and triumph when winning.
- Winning the Lottery – ACN’s 15-page primer on navigating a windfall.
- The National Endowment for Financial Education – Nonprofit with wealth counseling.
- KBR Certified Public Accountants – Firm experienced advising major lottery winners.
- Dr. Deborah Gudgel – Psychologist who treats overwhelmed lottery winners.
- Lucius Winn Institute – Offer personal finance courses for lottery winners.
Lottery winners should avail themselves of trustworthy guidance sources to help successfully navigate their new financial circumstances. Seeking outside expertise markedly improves outcomes.
Conclusion
Winning the lottery has immense financial pitfalls, with research showing a high percentage of major winners eventually going bankrupt. However, lottery fortunes don’t have to be squandered. Winners who opt for annuity payments, budget modestly, invest conservatively, limit spending, and employ prudent advisors greatly increase their chances of retaining wealth for the long-term. Exercising discipline, patience, and caution allows any lottery winner to make their prize last and achieve lasting financial stability.
