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$1.6 Billion Powerball Win: 7 Steps to STAY Rich
Lotto Winners are Notorious for Burning Through Cash but it Doesn’t Have to be That Way
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(Update 11/4/22: This post was has been edited to reflect the current Powerball Jackpot total.)
The Powerball Jackpot is up to an almost record-breaking $1.6 billion and many people are rushing to buy tickets.
The possibility of winning the life-changing amount of money has people dreaming up exactly how they would like to spend it — but therein lies the problem.
There are countless stories of lottery winners who beat the odds and win the life changing sum. However, there are also just as many stories of winners going bankrupt within five years — all because they impulsively spend their money.
If you want to retire and stay rich for the rest of your life, you just can’t do that. What you need to do is find a way to make your money earn more money — so that the well never runs dry.
I’ve actually given this a lot of thought and now I’d like to share the 7 steps that I would take to do exactly that.
Yes, Take The Cash Option
When you win the lottery, there are two payment options: annuity payments or the lump sum cash option.
It turns out that one option is clearly better than the other — but it might not be the one that you first expect.
Annuity Payments
One of the most popular pieces of advice I see on the internet and on TV is that you should take the annuity option (aka yearly payments).
The thinking behind this is that if you take 30 years of payments, then you will get the full dollar amount of 1.6 billion USD over the next three decades.
After all, the cash value is likely to be about half that amount — in this case, 782.4 million — so it seems like you’d get more money in the long run if you took the annuity.
If taken at face value, that actually does seem like pretty sound advice. But — it’s actually dead wrong.
Less may be more in this case!
Cash Option
Even though at first glance it seems like taking the cash option is the inferior option, it’s might actually be the superior option.
Since you’ll have a large lump sum of cash to work with, you will be able to strategically invest your winnings.
By investing all of your winnings into wise investments (more on that later), you’ll keep your initial winnings — also known as the principal amount — while you continue to earn more money in interest over and over again.
This interest is the money that you should be able to live off of for the rest of your life — if you invested wisely.
Even after Uncle Sam takes his extremely large cut of your income in taxes, under this scenario you should still be set for pretty much the rest of your entire life.
Pay Your Taxes
After taking the cash option, you need to do something that really kind of sucks: You’ve got to pay your taxes.
This is the part that really gets to people. Lottery winnings are not actually free money; you have to pay the federal and state income taxes on all of your winnings.
Often people don’t even realize just how much they lose to taxes. In states with no income tax, a large win will put you right in the top federal tax bracket of 37% — just shy of 40%.
In states that do have a state income tax, you have to pay that on top of the federal income tax rate. Often this extra state tax (combined with federal taxes) will help to reduce your total winnings by nearly 50%.
Here's the numbers just in case you were curious: $1,600,000,000 [Powerball Jackpot] $782,400,000 [Powerball Cash Option] $492,912,000 [Minus 37% Federal Income Taxes](-$289,488,000) $414,672,000 [Hypothetical 10% State Income Tax]($-78,240,000)
It’s a lot to lose to taxes, but it’s okay. You should be re-investing your after-tax dollars so that you can continually generate and grow your income year after year.
Buy Bonds
Usually you’ll see winners run out and buy luxury houses and cars. They just keep spending and spending— but quite frankly, that’s dumb.
If you keep spending, eventually your money will run out. That’s just plain fact, so don’t do it.
Instead, you should be investing your winnings into relatively low-risk assets — like bonds. That’s what I’d be investing in if I were to find myself in this situation.
Bonds are one of the least risky types of asset classes out there, but there is definitely still some risk. (You can learn a little bit more about bonds and their risks at the SEC’s bond webpage here.)
A good way to try to limit your risk is to pay attention to a bond’s credit rating.
As with any investment, there is a little bit of a learning curve but taking the time to research will go a long ways.
(If you’re curious about current bond rates, you can take a peek at Vanguard’s website here.)
Receive Income
Once you’ve purchased bonds, you’ll start receiving interest payments until the bond has matured.
Usually payments are paid bi-annually — every six months.
Depending on the type of bond you buy, the terms may change. So make sure to do your due diligence and research all that you can before making a decision.
Live on a Budget
The nature of bond investments means that any income that you receive from them will be fixed. There is no hourly wage or overtime, you get one set lump sum per period (remember, this period is usually six months).
This means that you really need to live on a budget. Yes, even if you’re rich you need a budget to make sure that you’re not spending more money than you’re bringing in.
Whether you’re making $3000 per month or $162,000 per month, you still need to track your spending. If you can do that responsibly, I don’t see how bankruptcy would ever be in your future.
Re-Invest
In a typical budget there are usually allowances for categories like bills, groceries, saving, giving, and leisure spending.
Whether or not you make seven figures, the same method is used. Though things may get a little bit more complex.
So if you win the jackpot, you may also want to add another category to your budget plan: investing.
Yep, you already invested your winnings into bonds but now you should really be reinvesting your earned interest.
Reinvesting your earned interest will allow you to continue to grow your wealth, with the potential to earn much more than the annuity payment option would have given you over 30 years (a total of $1.6 billion).
To do this you can buy more bonds, but you can also look at other investments as well.
Real estate and stocks are a couple of common examples of investments one could make, but the sky’s the limit on this really. I mean, you could open a pizza parlor if you really wanted to. Or maybe a chain of pizza of parlors?
Live Happy
Finally, now that all the plan has been laid out, it’s time to live happy.
In this whole scenario, staying rich is really just the result of following the same plan over and over again, and refraining from making impulsive decisions.
It’s worth it too, because financial security really does open up a whole world of possibilities for a person.
Stress relief alone would make a huge difference in most people’s lives, but the ability to control one’s own schedule and to pursue one’s own interests is a luxury that only the wealthy can really afford.
That — to me — is the true prize of the Powerball jackpot and if one is lucky enough to win it, it should be protected as much as possible.
© Oh Hey, It’s Ray
This article was originally published on OhHeyItsRay.com
Oh Hey, It’s Ray is a real estate investor, entrepreneur, and former real estate agent. She lives happily with her husband and two children in the Pacific Northwest. See more from Ray at her YouTube channel and on Ohheyitsray.com