According to Bankrate.com, two-time New Jersey lottery winner Evelyn Adams spent through $5.4 million in jackpots, saying, "I won the American dream but I lost it, too." The same article goes on to say that of the 12 things people spend money on when winning a lottery, investing ranks number 11. Planning and investing correctly can help ensure that your Powerball winnings last a lifetime. Along with reaching your financial goals, you can even take care of other people and have some fun in the process.
When you receive any large financial windfall like a Powerball jackpot, consider your goals before you invest or spend any of the money. You can outspend any amount without a plan and end up bankrupt. You can divide your money according to your goals. Set some aside for fun, some for charity and some to fund family trusts. Allocate another portion to grow for the future. Money allocated for each will be invested differently to reflect your goals.
If you have large amounts of student loan debt, consumer debt or other financial obligations, take care of these before you do anything else with the lottery winnings. While it may seem like a small amount compared with the jackpot, it is better to have all of your obligations taken care of. Also consider any future needs, such as college education for your children or potential long-term care for your parents, when determining how to invest the money.
Part of your winnings should be invested with the goal of keeping the principal safe. You can use the Certificate of Deposit Account Registry Service to invest up to $50 million in certificates of deposit and maintain the FDIC insurance on that amount. The CDARS does this by splitting the money among many banks, so as not to exceed the limit on FDIC insurance at each bank. You could do this yourself, but CDARS allows you to receive one statement and one Form 1099 at the end of the year. You can also invest in Treasury bills, which are guaranteed by the U.S. government. With a large sum of money like Powerball winnings, you can invest conservatively, still earning a substantial sum each year.
Growth investing with such a large portfolio becomes a luxury, since you can generate enough income from the invested funds to live comfortably. However, you still may want to boost some of your winnings over the long term, depending on your goals. In this case, traditional long-term investments such as growth stock mutual funds, bonds or growth stocks will work nicely.
The taxes on investment gains and interest earned on such a large portfolio can be substantial, since your marginal tax rate will increase as your income rises. Consider tax-free municipal bonds for some of your winnings. While the interest rate will be lower than what you may earn elsewhere, the earnings are free from federal income taxes and sometimes state taxes.
- Jupiterimages/Comstock/Getty Images