"Now, baby we can do it.
Take the time, do it right.
We can do it, baby.
Do it tonight."
— The S.O.S. Band
Taking money over time is a tenet of my faith. I believe in God, the Cincinnati Reds and not taking money in a lump sum.
I've spent more than 30 years in the structured settlement business, encouraging people to take payments over time. Watching thousands of people blow through lump sum payments made me a true believer in the power of lifetime income.
As I note in my new bestseller, "Life Lessons from the Lottery: Protecting Your Money in a Scary World," 98 percent of lottery winners ignore my advice. Thus it is no surprise that most of them blow the money in five years or less.
The same statistics holds true for people getting money from an injury settlement, inheritance or retirement. It doesn't make a difference if it is $10,000 lump sum or a $10 million lump sum. People blow through the money.
It makes sense when you think about it. People are used to having money come in every month. Mortgages, utilities and almost every kind of bill payment are done monthly. People get paychecks on a bi-weekly or monthly basis. They get social security and defined benefit pension payments on a monthly basis. Thus, managing a lump sum is a completely foreign skill. As survey after survey shows, most people don't do well.
Taking lottery payments over time allows you to adjust with the money coming in on a gradual basis. If you make mistakes and lose all your money the first few years, you have 24 more opportunities to get it right.
There are also some tax advantages to taking lottery money over time, as you are taxed on the money as you receive it. That may not be relevant with $100 million, as you are always going to be in the highest tax bracket, but a person who gets $1 million and takes $50,000 a year should be able to save.
When I worked as a Series 7 registered representative (often referred to as a "stockbroker"), I had a large clientele of doctors, lawyers and other well-educated professionals, along with injured people and the occasional lottery winner.
I had my clients allocate their money into several types of investments and did my best to keep them from panicking when one class of investments did poorly.
Over the years, I kept noticing one thing: People who had easy access to cash were the ones most likely to fall off the bandwagon. They would have "emergencies," such as wanting to buy a new car, a houseboat or taking their friends on a cruise. Sooner or later, the money would be gone.
In the meantime, I had a parallel business that provided structured settlement annuities to injured people. Structured settlements are only offered to injury victims and are tax-free. Thus, they are an attractive choice compared to taxable alternatives.
A structured settlement annuity can be designed in a number of different ways, but the way I normally recommend is to pay it out over a person's lifetime, increasing at two or three percent a year to keep up with inflation and guaranteed for 30 years to a beneficiary in case the person dies.
One of my first clients was a young man who lost his arms and legs in an accident and lived with a motorcycle gang. He received roughly $3 million. If he and the motorcycle gang had gotten their hands on $3 million dollars, they would have had the party to end all parties until the money was gone. I set him up so that he received $10,000 a month. Thus, they had a party every month up until he died many years later.
I realized the psychology was like dieting. I struggle with my weight and used to start a diet about once a month. If I start, but have all my favorite foods in the refrigerator, I will fall off the diet immediately. If I have to drive to the store about two miles away, I think about it more and sometimes won't go. If I have to drive 25 miles to get fatty foods, I am far more likely to stick to the diet.
The financial analogy is that having all your money in a savings or checking account is like having food in the refrigerator. Putting money in a mutual fund or certificate of deposit, where it takes some effort (and sometimes penalties and tax consequences) to cash it in, is similar to driving to the store two miles away. A structured settlement is like the 25-mile drive for food. You have to do a lot of work to sell it and take a huge financial hit when you do.
Don McNay, CLU, ChFC, MSFS, CSSC is an award winning financial columnist and Huffington Post Contributor. You can read more about Don at www.donmcnay.com.
"Now, baby we can do it.
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