by John Darer® CLU ChFC MSSC CeFT RSP CLTC
Do limited options for lottery winners contribute to the risk of financial dissipation? The choice typically boils down to cash or annuity, with many opting for the cash. Unfortunately, some exhaust their winnings despite beginning their post-lottery life with more than many people manage to save over a lifetime.
The latest story about a lottery winner to end up a financial loser is Norfolk, England's Michael Carroll. Carroll , who managed to squander approximately $14 million he won February 11, 2002, at age 19, over the course of 8 years (after being down to about $900,000 in 6 years).
- Lost £1million on the dogs and horses (gambling)
- Spent £1million on the Rangers his favorite soccer team
- £400,000 fleet of luxury cars (which he sold in 2009 and spent the proceeds)
- Boasted about sleeping with four a day - a total of 2,000 at a cost of £100,000 over eight years - in order to sate his sexual appetite.
- Reportedly lost an estimated £80,000 on a property deal in Dubai after the market fell.
- In 2004, Carroll was jailed for five months after failing to comply with a drug treatment order, imposed as part of a sentence for cocaine possession
A May 30, 2010 story in Britain's Daily Mail quotes Carroll as reflecting "'The party has ended and it's back to reality. I haven't got two pennies to rub together and that's the way I like it. I find it easier to live off £42 dole than a million. He said others had benefited from the win more than he had. 'I'm just glad it's over. There were also vultures everywhere after my cash. I started to see what people were really like,' he explained.
Is it fair to the taxpayers that someone who won a sizeable sum is allowed to go on welfare and possibly qualify for Medicaid as a reward for a reckless financial downfall in such a short period of time after their windfall?
On one hand, it could be argued that people should have the freedom to make mistakes in their own lives. After all, they’re already making poor business choices every day that deplete their savings.
- They borrow too much
- They make bad investment decisions.
- Some get scammed by the likes of a Bernie Madoff, Scott Rothstein, Marc Dreier or lower level alleged Ponzi hoods like "Dirty Barry" and Nicholas Cosmo
- Some get fleeced or taken advantage of by friends or family, or salesmen with a hot tip (never answer an investment survey!).
Lottery winners today are typically offered only the binary choice of a lump-sum payment or an annuity. Why aren't there more alternatives available to help them make more informed choices?
Why not allow a lottery winner to allocate a portion of their winnings into an annuity? This would provide them with a stable, secure income while giving them the opportunity to grow and manage their newfound wealth.
Perhaps a choice of all cash, all annuity, 1/4 annuity, 1/3 annuity and 1/2 annuity. There should be enough options so that a person can make a reasonable choice. Perhaps there should be some sort of guidebook to help people make an informed decision.
Using US rates for illustrative purposes, a 1/4 annuity would have meant $10.5 million in cash about $3.5 million into the annuity at say 5.41% tax deferred, the 30 year bond rate of February 11, 2002.
So our "hero" would have close to $7 million in net cash and an annuity that pays him $189,350 a year for 30 years. After assumed 35% taxes, the annuity would be about $123,077. He could blow all the cash and still have a meaningful income. Have a look at his mug in the link below. Think he'd be smiling more with more than the equivalent of $75 or so dollars a week on the dole?
Moreover, the secondary market assures that liquidity is still available.
Some might ask, why play the bossy guardian? Who cares if someone burns through their fortune like it’s Monopoly money? I say, why not step in? Looking back, if someone like Michael Carroll finds surviving on 42 pounds a week less stressful than juggling millions, maybe a happy medium isn’t such a bad idea.
Some of the challenges faced by Mr. Carroll could easily be encountered by a personal injury victim who, due to their own injury or the loss of a loved one, comes into a significant amount of money. Read our section on Structured Settlements for Minors and Settlement Planning For Children and Young Adults,
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