The incredible $1.6 billion Mega Millions jackpot was finally won this week by someone purchasing a single ticket in South Carolina. I’d be willing to bet $1.6 billion the winner wasn’t you. In lieu of a 30-year annual payout, the winner can choose a lump sum of about $878 million (before taxes). Not surprisingly, most lottery winners choose the lump sum. Although it may be a fun way to spend a few dollars and dream of what you might do with such a fortune, it is not a good financial planning strategy.
The ability to retire with dignity and fund the other important goals in your life is usually no accident or windfall. It is most likely the result of a disciplined financial plan and prudent investment strategy working in tandem. Most successful investors have several things in common. They are serious and disciplined. They live on less than they make and prudently invest the rest. They avoid high costs, high taxes and unnecessary risks. They do not “play the market” but instead rely on the power of optimal asset allocation, broad diversification and periodic rebalancing to carry the load for them.
They focus on their goals, the amount of money needed to fund those goals and the rate of return required in view of their tolerance for risk. And since many investors will abandon well-designed plans given the powerful influences of fear and desire, many choose to partner with an experienced team of financial professionals to advise them and hold them accountable. Even better are those teams whose success is dependent on their clients’ success.
You don’t have to win the lottery to be the recipient of a substantial lump sum. It can result from an inheritance, life insurance payout, pension payout, divorce settlement or proceeds from a lawsuit to name a few. Powerball notwithstanding, lump sums are typically intended to compensate a person for lost income due to retirement, death, disability or divorce. On rare occasions, some people leave this world with a substantial nest egg bequeathed to loved ones or their favorite causes.
In any event, without a detached, unemotional discipline and sheer determination to succeed, you may find yourself becoming an unwelcome statistic – someone who wakes up one day realizing too late that they will not have enough money or time to fund life’s most important goals. In that case, you may want to keep buying lottery tickets.