What If You Won the Lotto? How to Handle a Big Financial Windfall

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118611254The winner of the largest single-ticket jackpot has yet to step forward. The Powerball ticket, which was sold at a Publix supermarket near Tampa, Fla., for the May 18 drawing, is worth $590.5 million. If you have that ticket or something similar, you might want to read this story.

But a surprise payday isn’t always a longshot. Windfalls can come from more mundane things like an inheritance, a legal settlement or a sale of a small business. “Most of the time an unexpected windfall is from a bonus that someone wasn’t expecting or from their relatives doing smart estate planning,”  says Ellen Derrick, a CFP® with LearnVest Planning Services.

“A lot of emotions can be attached to this sudden wealth depending on where they money comes from,” says Robert Pagliarini, a CFP® and president of Pacifica Wealth Advisors in Mission Viejo, Calif. About 70% of his practice is focused on clients who have been surprise recipients of large amounts of money. “You need to address the emotions first. Otherwise, you are going to make very bad financial decisions.”

Vast sums of money aren’t a guarantee for the easy life. Lottery winners tend to file for bankruptcy at double the rate of the general population. A Sports Illustrated investigation found that 78% of NFL players file for bankruptcy or experience financial difficulties within two years of retirement. 70% of families lost control of their assets in the first generation following wealth transfer, according to a 2010 survey of more than 2,000 rich families by The Williams Group, a wealth management firm.

If you are lucky enough to gain a windfall, here’s how you keep it:

Put Your Money on Pause

Receiving a large sum of money without warning is a stressful situation that can mess up a person’s decision-making. “We humans have a cognitive decline when we are stressed. Receiving sudden money is stressful,” says Susan Bradley, CFP® and executive director of the Sudden Money Institute, which helps financial advisers deal with clients in these situations.

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The experience of a windfall jars the reptilian brain of recipients, says Bradley, who has a neuroscientist on staff at her institute. People typically react in four ways: They want to fight with family and advisers over the money, they want to flee the situation and not deal with their newfound wealth, they freeze by analyzing all the possibilities that the money brings, or they appease all the requests from others about how they should spend it.