Last week’s Powerball jackpot reached over $1 billion, causing many people who wouldn’t normally buy tickets to fork over some cash for the sake of making sure they at least had a horse in the race. People seemed to buy tickets “just in case,” because, as many of the people I spoke to about it said, “you just never know.”
I’ll admit that I bought into the frenzy—I didn’t buy a ticket myself, but I did have fun thinking about what I would do with the winnings. The fantasy was short-lived, however, as my thoughts quickly segued into mulling over the pitfalls of spending money on frivolous things and the financial complexities that come along with suddenly acquiring a large sum of money. But before I could finish working through the tax implications in my head, the winners had been announced and the Powerball buzz was dying down again.
While the dreams of “what if I won $500 million” may be behind us for the time being, financial advisors can still capitalize on the Powerball headlines by using it as a conversation starter with their clients.
There are three financial matters for which the lottery can serve as a reminder for financial advisors and clients alike to consider and discuss:
1. Saving money should be a priority, not an option
Oftentimes people think that they don’t have the means to save more money, or that they have to choose between what they are saving for (retirement, college or that dream home). I’ve stressed time and again how vital it is that we make sure we save for our futures, particularly for our own retirement, and the Powerball gives us another entrée into having the saving conversation. Think about it this way: Powerball tickets cost $2 each, and chances are that those who opted to participate bought more than one ticket. The odds of them winning were nearly impossible, so in reality, that money was as good as gone from their pockets the minute they bought the ticket. Rather than spend $2, $4, $6, $10 on a pipe dream, why not put that extra cash into savings? If you have the means to buy a lottery ticket, then you have the means to put away a few extra dollars on a regular basis. Winning the lottery is a wish, but growing older and retiring is a certainty.
2. Tax planning should be a continual process
How often do we hear stories about big lottery winners spending it all and winding up bankrupt just a few years later? One of the reasons for this might be poor tax planning—winners may not take into account that the money pushes them into the highest tax bracket, and that the taxes on such a large sum of money are staggering. Lottery winner or not, this is a good trigger for having the tax planning conversation with clients. Make sure that you are checking in with them regularly with regards to their taxes, and that you also work with their tax professional as a team to come up with an appropriate tax and financial plan.
3. Naming beneficiaries should not be overlooked
Maybe one of your clients did win the lottery (I’m guessing not), or maybe they came into wealth via inheritance. Maybe they just want to protect the wealth they have built the old fashioned way. Whatever the case may be, talking about money and large sums can be a great lead into having the beneficiary talk. Whom do your clients want to entrust with their accumulated wealth when the time comes? Perhaps a trust is the way to go, rather than a person. There are several options when it comes to what happens to your money after you are gone, but the most important thing to remember is simply to have this discussion and make sure your clients have beneficiaries for all of their assets, lottery winnings and or (likely) otherwise.
I won’t deny that thinking about effortlessly winning hundreds of millions of dollars is fun, but the real takeaway from the Powerball frenzy is that financial, tax and retirement planning are important processes and should be carefully thought out with a professional. Financial advisors can use the media coverage of this lottery to their advantage, leveraging it to remind their clients that the lottery is all fun and games until reality sets in—win or lose, we all have to be vigilant of our finances and our future.