INTELLIGENT INVESTING INVESTING PERSONAL FINANCE BOOKS ASK MIKE? ABOUT DISCLAIMER When Getting Financial Advisor Help After Winning PowerBall or Mega It May Pay to be Rational POSTED BY: INTELLIGENTINVESTING.COM APRIL 29, 2019 It is disturbing to me how as a society we are so clueless about what the mathematical impact of winning a large Power Ball or MegaBall jackpot and then how financial illiteracy sets in. John Allen Paulos in his 1988 book “Innumeracy” articulates how mathematical illiteracy and its consequences create an inability to deal rationally with very large numbers and probabilities associated with them that results in misinformed government policies, confused personal decisions, and increased susceptibility to pseudoscience of all kinds. https://books.google.com/books/about/Innumeracy.html?id=KDqD95Lsp3UC&printsec=frontcover&source=kp_read_button This article focuses on if you won the lottery but also has relevance for individuals who inherit money or are awarded large some of money through stock options, bonuses etc. The April 2019 winner from Wisconsin of the third largest lottery in U. S. History ($768 million) claimed his power ball ticket by selecting the cash option at $477 million. There are all these media articles and blog posts reporting the impact of taxes and my response is: Who cares! Almost every media report I see understates tax impact because the initial payout the IRS collects is 25%. But when you file your taxes in these big winner stories the federal income tax rate is 37% of the cash value + any state income tax due. In the case of the Wisconsin situation another 7.65% of state income would be collected when taxes are filed. So the net after tax for this guy in Wisconsin is approximately $264 million. Taxes aside which cannot be avoided, what disturbs me is not sure society understands the impact of acquiring $264 million after tax. In the Wisconsin case the media reports before the ticket claimed the winner a hired team of lawyers and financial advisors. The question is why do you need a team of lawyers and financial advisors when you win the lottery? Yes you need lawyers for estate planning purposes, but that is a separate issue and does not necessarily require a team of lawyers or advisors to Invest the lottery winnings You may need legal advice setting up legal entity like a partnership if the funds are being allocated to multiple number of winners, but again that does not require a team of lawyers. One cannot imagine setting up a legal entity that would incur more than $10-20k in lawyer fees. We can only imagine the fees these lawyers and advisors are charging these lottery winners. Not sure what was advised, but without any financial advisors or lawyers, by simply purchasing a of a basket AAA+ rated municipal bonds or municipal bond fund from group like Vanguard (low fees) would result result in lifestyle that would enable a tax free ride for life. Yes the advisors will claim market risk and fear for not taking their advice. Historically AAA+ rated tax free municipal bonds have had low default risk. Assuming a basket of AAA+ tax free municipal bonds yields roughly 3% annualized, $264 million investment in AAA+ basket of tax free municipal bonds would receive payments of $7.9 million a year or $21,696 per day for life without every touching the $264M in principal. The fees to buy this basket AAA+ rated tax free municipal bonds would not be significant if purchased through a Vanguard or an Interactive Broker account. Of course as bonds mature another set of bonds would need to be purchased to replace them. The alternative is using tax free municipal bond fund from Vanguard where they do the work for you and just enjoy life. Also not saying you would not use the money do something just showing impact on what it means to have $264 million $21,696 per day solves a lot of life problems including helping family, making donations to charity every year, traveling, driving a great car and purchasing a home. And we are not saying you cannot use the funds to buy home, a business, or some other expenditure. And all the investment and planning decisions do not need to be done all at once. In fact slowing the process to ensure you make the investment best allocations to AAA+ tax free municipal bonds can be done by parking the money in an “Interactive Brokers” account with check writing and debit card access pays roughly 1.9% on idle cash. On $264 million that is $5 million a year before tax or $13,742 a day before tax. https://www.interactivebrokers.com/en/index.php?f=1338 These options to invest the cash do not need to be rushed. There is time to contemplate the rest of your life and think without an army of people rushing the process and collecting fees as they do it. Think about this: you could live everyday the rest of your life with no risk, minimal fees and accomplish all your wishes and desires. It would be hard to spend $21,700 a day unless you were completely foolish. But of course statistics show 70% of lottery winners end up broke. And finally you would be receiving $21,700 a day for life without touching the principal, incurring future federal income tax and paying unnecessary money management fees. In summary, not saying getting financial advisor help is bad. But question is do the financial advisors provide help in ensuring minimal fees are paid to invest the powerball winnings? https://www.cnbc.com/2019/04/24/wisconsin-powerball-winner-franco-had-under-1000-in-his-bank-account.html Facebook Twitter LinkedIn Email Previous post Next post BE THE FIRST TO COMMENT ON "WHEN GETTING FINANCIAL ADVISOR HELP AFTER WINNING POWERBALL OR MEGA IT MAY PAY TO BE RATIONAL" Leave a comment Your email address will not be published. Comment Name * Email * Website Email Subscription: RECENT Why Impact of Fees On Mutual Funds Is Only Part Of Challenge To Investors When You Factor In Asset Turnover And Short Term Capital Gain distributions When Getting Financial Advisor Help After Winning PowerBall or Mega It May Pay to be Rational Why Investing In Companies with High Returns On Capital and A+ Financial Ratings Versus Focus On Dividend Payments May Be More Important? CATEGORIES Uncategorized ARCHIVES May 2019 April 2019 COPYRIGHT 2021 | MH NEWSDESK LITE BY MH THEMES