The Daily Interview: Handling the Slings and Arrows of Outrageous Fortune

Sometimes it takes just as much luck for lottery winners to hold on to their money as it does to win it in the first place.

Daniel Moisand President Optimum Financial Group

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Daniel Moisand, a financial planner and president of Optimum Financial Group in Melbourne, Fla., knows this well. He's advised a number of lottery winners who've won several million dollars each. While he's had clients spend money on such extravagant things as a $250,000 underwater aquarium or a fleet of planes for their children, most are conservative investors whose diversified holdings are keeping them above water in this hazardous market.

Moisand explains how he keeps these millionaires from blowing through their newfound riches.

TSC: What's the first thing you advise new lottery winners to do?

Moisand: We tell them to declare a decision-free period of time, usually at least six months, where they will commit to not make any significant purchases or decisions. This gives them a defense mechanism whereby they can tell people, "Look, I'm not making any decisions until I get my ducks in a row." Most people understand this. The ones that don't are usually people you don't need to be doing business with in the first place.

The second thing is that they need to assemble a team of trustworthy advisers. At a bare minimum, they need an attorney, an accountant and a CFP. They need an attorney because whether they like it or not, they have a completely different estate situation, for one thing. And one of the distinguishing features of a lottery winner vs. someone who has suddenly come into money is that the lottery winners tend to be public.

It's in the paper that they won. All the neighbors know about it. Word gets around real quick. The states, of course, encourage the winners to stand up there with the checks because they like the publicity. But this makes lottery winners targets for a lot of things. They get inundated with business and charity offers. And if they're not careful, they're liability-prone.

TSC: How easy is it for a lottery winner to just blow through all their money?

Moisand: Very. That's why we really emphasize the decision-free time. One of the things we do during this time is ask the winners to write a wish list. It's totally understandable for someone who has come into a large sum of money to want to go and get some things or do some things that were not possible before. And if a person wins $2 million in a lottery, after taxes, they're down to $1.2 million and you don't have to get a huge home to blow a half a million dollars and the next thing you know, you're left with $700,000.

That's nothing to sneeze at, but that's not going to generate a lifetime income stream, adjusted for taxes and inflation, for most people, above much more than $35,000 a year. And there's a real probability that $700,000 isn't going to be sustainable for a normal person's lifetime. It doesn't take much at all to take something that could be a lifetime of security and have it go on just a couple of things.

Obviously, people who are seeking my counsel are looking to be good stewards of their windfall, so it isn't likely that they'll invest in bad business ventures or blow it on their friends and end up with nothing. But there certainly have been a lot of stories of lottery winners blowing through the whole thing.

TSC: What are some of the craziest things your clients have done with their money?

Moisand: The ones that come to mind are the underwater observatory that a man built off his dock in Jupiter, Fla., for a cost of about a quarter-million bucks. Then there was my client in North Carolina who had three kids, one in Mississippi, one in Georgia and one in Alabama. He was frustrated with not being able to see them a lot, so after he won the lottery he bought them all small planes along with flying lessons. Another client, a couple in Greenville, North Carolina, got so tired of being solicited for their winnings that one day, in the middle of the night, they got and split like the Baltimore Colts [football team] did. They moved 150 miles away to Greensboro, North Carolina.

TSC: Do most people quit their jobs?

Moisand: People who are in jobs that they hate or in jobs where they are being mistreated are absolutely happy to get up and say, "Take this job and shove it." But about half don't quit their jobs because they are not quite ready not to have to be someplace, mentally and emotionally. When you retire, you pick the date most of the time and you get to prepare yourself to retire to something. When the money is suddenly thrust upon you, a number of people feel out of sorts about what to do with themselves.

TSC: Do you normally recommend lottery winners take a lump sum or annual payments?

Moisand: By the time I see them, they've already decided that. The vast majority of lottery recipients across the country seem to be taking lump sums, which is probably more an indication of human nature. You know, grab it while you can, rather than delayed gratification or thorough analysis of the numbers.

There is really never a pat answer to this question. It always depends on a person's circumstances. But some people know that if they got a lump sum, they would blow it.

TSC: How much do you recommend that winners spend each year, and how hard is it to convince them to stick to this?

Moisand: I think that the starting point is you don't convince them of what they should do. You have them set their own goals and then you help them understand whether or not those goals are realistic. Before the last year and a half, it was common for people retiring to expect returns on their investments of 10% or more a year, and to draw down their accounts by that much. But that isn't the way the markets always work. They don't always return that much, so a realistic withdrawal rate I recommend is 5% each year, although everybody's different.

TSC: How do winners tend to invest and what do you recommend?

Moisand: Believe it or not, most people lean to the conservative side. You might think that now that they have the capacity to take on more risk, why not do it, but most of them feel like, "Wow, I won! I won the lottery! All of my goals are achieved. We have the opportunity for security. Let's not take risks if we don't really have to." So, they tend to be more concerned with taxes and beating inflation over time and not much more than that. They're not really interested in hitting the highflier in the stock market.

Most of them seem to fall to a 60/40 split, with 60% of their assets in diversified equities and 40% in bonds. The bonds are almost always municipals since they are in a much higher income tax bracket, and when you look at the after-tax results vs. taxable interest vehicles, the munis tend to do much better.

TSC: How have your clients' portfolios been doing in the current downturn?

Moisand: They're beating the market, but that's not really their goal. It's really a byproduct of being well-diversified, and in a down market they are not suffering as much as the more aggressive investors. In the year 2000, we've had very modest gains with some of these portfolios, while the ones closer to an 80/20 equity/bond split were down 7%, 8%.

TSC: Is there anything about lottery winners that you have learned that you wouldn't have expected?

Moisand: One thing that has really surprised me is that after a period of years, the money doesn't seem like a windfall to them anymore, but that it's actually their money. Early on when someone comes into money, they tend to think that they didn't do anything to earn the money except for spend a buck at a convenience store. In the beginning, they could be quite generous. But after a while they start to take emotional ownership of the funds and even begin to resent friends and family asking for money. They'll also resent the amount of income taxes they have to pay.