If you ever dream about winning the lottery, then you probably also have thought about how you would spend the money. But, have you ever thought how you would invest your lottery winnings? Investing lottery winnings can be complicated due to tax issues and the volume of the money received. If you have a huge win, it's time to start thinking about how to invest the lottery winnings.
- Skill level:
Decide if you're taking the cash option. Most lotteries offer both a cash option and a payment over years of time. If you take the cash option, the money is about half of what you would get in payments, but you have it available and can make it work hard for you, potentially making it even larger.
Realize how much money you have after taxes. Check your local state tax law and see if the money is taxable there. Some states don't impose a tax on the states lottery winnings. Calculate about 33.3% for federal tax if your winnings are over a million.
Make certain that you have enough to pay off all bills. If you receive monies in the millions, the hopes are that this is true. Once you have all your bills paid in full, decide how much you need to live on.
Find a tax deferred or tax free investment for a chunk of the money. The first year in particular, about one third of all monies made from your investment will go to taxes. Try to hide some of the growth from the government's hand.
Seek investments that give the income you need. If you've decided to suddenly retire due to the windfall, keep in mind that you may need more money because you have more time to travel and pursue hobbies. A variable annuity with guarantees can give a consistent and yet growing income.
Divide the money into asset classes. Stocks, bonds, and fixed investments like bank CD's are the primary investments and should be balanced according to your age and risk tolerance. Don't invest more than 10% of your money into real estate or REITS. Spread the risk.
Make certain that all investments are spread amongst different types within each investment class. Having large sums of money will allow you to take more risk and have more stock. If the market drops, you can afford to sit while it starts to climb again.