Winning the lottery is an automatic ticket to a life of comfort and luxury. Everyone expects jackpot winners to be able to live comfortably and experience their wildest dreams after winning the lottery. Although this holds in many cases, numerous winners have lost all their winnings and faced financial difficulties within a few years of their big win. This can happen for various reasons, which we will discuss in this guide.
This guide sheds some light on the statistics, reasons, and psychological impacts of sudden wealth. It also offers insights and tips on how lottery winners can avoid financial pitfalls.
- Studies show that lottery winners are significantly more likely to go bankrupt within three to five years than small prize winners.
- Lottery winners become broke due to poor financial management, extravagant spending, bad investments, and pressures from friends.
- Lottery winners must withstand sudden wealth syndrome to be able to manage their new-found wealth.
- You can sustain and even grow your winnings with proper financial planning and advice.
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What Does the Statistics Say?
It is difficult to nail down an exact figure regarding how many lottery winners go broke. The closest we have is research published by Hankins, Hoekstra, and Skiba (2011) in the Review of Economics and Statistics.
The study revealed that jackpot winners are 50% likelier to become broke within the next three to five years than small prize winners.
Let’s take a deeper look at the study.
In this study, the researchers analyzed the bankruptcy records of Florida lottery winners. Then, they compared winners who won between $50,000 and $150,000 to those who won less than $10,000. The research showed that people who won between $50,000 and $150,000 are 50% less likely than small winners to become broke immediately after winning. However, they are more likely to file for bankruptcy three to five years after winning.
Further, they discovered that large winners’ net assets and unsecured debts were no different from small winners’. This implies that the financial status of large winners showed no noticeable difference despite winning much more than small winners.
The graph below illustrates that the probability of bankruptcy for big winners was lower than for small winners within the first two years. Still, it outpaced it between the second and third years and eventually met with the small winners in the fifth year.
Source: Hankins, Hoekstra, and Skiba (2011)
Here are some examples of lottery winners who went broke:
- David Lee Edwards: David Lee Edwards won $27 million from Powerball, but in five years, he was broke and living in a storage shed with his wife. They squandered their fortune on cars, mansions, and planes, spending $3 million in three months and $12 million in one year.
- Jack Whittaker: Jack won $314 million from the Powerball jackpot. He soon became a cheerful giver, spending money on family members, strangers, and churches. At some point, he got robbed. Within four years, his winnings were exhausted.
- Lara and Roger Griffiths: The Griffiths won a $2.19 million jackpot. Roger invested the wnnings in his music career, which later didn’t turn out well. Lara got a taste for luxury, overspending on cars, designer clothes, and a luxury home. Eventually, they were left with less than $10.
- William Bud Post: Will won $16.2 million in the Pennsylvania lottery in 1988. However, he lost everything and was $1 million in debt within one year. His lottery win changed the people around him. His girlfriend sued him for a third of his winning, and his brother hired a hitman to kill him so he would inherit a share of his winnings. In his words, he claimed he was a lot happier when he was broke.
- Sharon Tirabassi: Sharon Tirabassi won $10 million in Canadian dollars from the Ontario Lottery. She splurged her winnings on a big house, fancy cars, designer clothes, and lavish parties. Over time, she exhausted her winnings and returned to her former life.
Common Reasons Lottery Winners Go Broke
From the examples above, we can see that winning the lottery will definitely change your life. However, even the biggest lottery winners can go broke. Your financial breakthrough might be short-lived if you do not properly manage your winnings. Here are a few reasons lottery winners go broke.
- Poor financial management
Many lottery winners who fall into financial ruin share a common weakness: they do not manage their newfound wealth properly. This is often because they lack the financial literacy needed to manage their sudden winnings correctly. For example, Roger Griffiths invested a huge chunk of his $2.19 million winnings in his music career, which later did not succeed.
Lottery websites like theLotter, LottoGo, WinTrillions, and Lotto Agent help winners during the prize-claiming process. However, their assistance usually does not extend beyond that. Being thrown into a situation where you have millions of dollars without understanding the basics of managing such wealth can lead to some not-so-great financial choices.
- Extravagant spending
Another common reason is the reckless spending of lottery winners. A lottery win allows people to live out their wildest dreams, travel on vacations, and improve their living standards. A common example is Sharon Tirabassi; she spent most of her $10 million winnings on luxury cars, houses, and designer clothes.
These include splurging on high-end items like luxury cars, extravagant homes, or designer apparel without considering the future impact of such spending. However, most lottery winners fail to realize that the money can and will run out if not managed carefully.
- Bad investments
Lottery winners may also be persuaded into risky investments they don’t fully understand. Some unscrupulous financial advisors may take advantage of their naivety to recommend high-risk investments. Without proper guidance, winners may fall prey to these schemes and lose their hard-earned winnings.
- Pressure from friends and family
Lottery winners face pressure to share their wealth with friends and family. This can result in unsustainable financial support and, eventually, financial ruin. A typical example is Jack Whittaker; he just couldn’t say “no” and kept giving until his winnings finished.
Psychological Impact of Sudden Wealth
While winning the lottery is a dream come true for many, it can also be a burden. It can be a catalyst for emotional and mental health issues and something psychologists are calling sudden wealth syndrome. This syndrome refers to people’s psychological and emotional challenges when they get rich abruptly.
Jackpot winners may feel uncomfortable about their new status as millionaires and fear they lack the mental strength to handle the change.
Common symptoms of sudden wealth syndrome include
- Excessive spending
- Feeling isolated from friends and family
- Spontaneous decision-making
- Feeling undeserving of your new-found wealth
- Fear of losing new-found wealth
- Afraid to tell friends and family about it
- Tension in relationships
Unless the lottery winner actively tries to confront the emotional and mental struggles of sudden wealth syndrome, they risk mismanaging their winning and getting broke in a few years.
How to Avoid Going Broke After Winning the Lottery
You can avoid this sad fate. With proper management, your lottery winnings can last you for as long as you live and can even help you create more wealth. We found a few ways to avoid going broke after winning the lottery.
Here is what we discovered.
- Seek professional financial advice
Often, lottery winners lack the financial education to handle their winnings. As exciting as it seems, managing millions of dollars is challenging, especially for those who have yet to handle anything close to that sum. This sudden change can be overwhelming, so we recommend enlisting the help of a financial advisor.
Financial advisors and lottery lawyers can guide lottery winners through wealth management. Their expertise can provide peace of mind and a clear path forward, allowing you to enjoy your winnings and ensure it benefits you and your loved ones for years.
- Create a sustainable budget
Before you start splurging, we recommend setting a budget. We know it might be tempting to go on a spending spree, but you shouldn’t do that just yet. Take a moment to create a sustainable budget.
Your financial advisor can come in here. They can help you figure out a realistic budget that covers the long haul, factoring in things like saving for a house, putting money aside for retirement or any other things you might need in the future. The goal is to avoid making rash spending decisions and stick to the budget, laying a solid foundation for your finances.
And finally, a word of caution: sudden wealth can paint a target on your back for opportunists looking to benefit from your fortune. It’s important to stay vigilant and clear of offers or investments that seem too good to be true.
- Invest wisely
Investing is a great way to generate passive income from your winnings. Most lottery winners make luxury investments in penthouses, resorts, condos, and mansion. However, diving into investing without a plan can be like navigating a ship without a compass. It’s essential to step into the investing world with wisdom and strategy to lower risks and aim for success.
Teaming up with a qualified financial advisor can make a world of difference. They can assess where you’re at financially, help you pinpoint your investment goals, and craft an investment strategy that fits your risk tolerance and timeline. Plus, they’re there to offer advice and support as you navigate through your investment adventure.
- Stay grounded
Maintain a modest lifestyle. Don’t overspend. This way, you can get the most from your winnings and avoid bankruptcy. Real-life stories of lottery winners who remained financially stable often involve continued prudent financial habits.
Lessons from Lottery Winners Who Stayed Wealthy
Thankfully, there are many lottery winners stories who are still rich. Not every jackpot winner gets broke; some make good use of their winnings and continue to live the life of their dreams. Here are some examples of lottery winners who stayed wealthy.
- Brad Duke: Brad was a lucky winner of a $220 million Powerball jackpot in 2005. Immediately after winning, he hired a financial advisor who helped him manage his wealth. He invested in low-risk index funds, real estate, and oil and gas. He also avoided an extravagant lifestyle. Even today, his lottery win sustains him.
- Cynthia Stafford: In 2007, Cynthia won a jackpot of $112 million from the Mega Millions, setting herself up for life by investing in her dream of producing movies. She also donated to charity but worked with financial advisors to manage her wealth effectively and balance investments and expenditures.
- Manuel Franco: Manuel France won a $768.4 million jackpot prize at Mega Millions prize. He immediately sought financial and legal experts to know how to handle his new-found wealth. He stayed anonymous to prevent public attention and pressure.
- John and Lisa Robinson: John and Lisa Robinson won $528.8 million from the Powerball lottery. They managed their winnings with financial advisors, lawyers, and accountants. Then, they paid off their debts and invested in a diversified portfolio to ensure long-term financial security.
- Shane Missler: Shane won the Mega Millions jackpot of $451 million in 2018. He was just 20 years old then, but he had the wisdom to seek the help of financial and legal professionals. Shane also established a private limited liability company to manage his wealth. He also keeps a low profile and avoids public scrutiny.
From the examples above, we can see that all wealthy lottery winners had the general idea to consult financial experts, invest smartly, and stay modest. So, it is possible to maintain and grow your wealth—the key to staying wealthy lies in staying grounded despite your new status as a millionaire.
Conclusion
As fantastic as winning the lottery sounds, it’s not just about hitting the jackpot and living the high life indefinitely. Your winnings can run out. So you have to plan wisely. Look at the stories of players who got broke and those who remained wealthy, and learn from those who’ve been there before.
Understanding these potential hurdles and arming yourself with knowledge from both the cautionary tales and the success stories can equip you to make the most out of your prize, should you ever hit the lottery jackpot.
FAQs
Why do lottery winners often go broke?
This happens due to financial mismanagement, reckless spending, and bad investments. Most lack the financial knowledge to handle millions of dollars.
What is the biggest mistake lottery winners make?
The biggest mistake they make is not having a plan before claiming their money. Usually, we recommend that lottery winners take their time to reflect and consult a financial advisor before they come forward to claim their winnings. This way, you can avoid the sudden pressures that lottery winners face.
Who was the largest lottery winner who went broke?
The largest lottery winner who went broke was Jack Whittaker. He won $314.9 million in the Powerball lottery but lost everything in five years due to failed investments, extravagant spending, theft, legal issues, and many personal tragedies.
What should you do first if you win the lottery?
Before anything else, take a minute to reflect on your new lottery win. Afterward, you should consult financial and legal advisors to get advice about approaching the prize claiming process. They can advise you on tax rates, whether to get a lump sum or annuity, and whether you can claim your prize anonymously.
Can lottery winners maintain their wealth?
The key is not to get carried away with how large your winnings are. Lottery winners who maintained their wealth achieved that by making smart investment choices. They also worked with professional financial planners and advisors to manage their wealth.
Where can I find financial advice for lottery winners?
They can get financial advice from financial advisors and wealth management firms. They can help you manage their winnings and educate you on how to get the most from it.
