Published: April 14, 2008 03:05 pm            

Don’t take the money and run

“Take the money and run”

— Steve Miller Band



Brett Arends at the Wall Street Journal wrote a column about lottery winners titled “Take the Money and Run.”

He said lottery winners should take the lump sum instead of annual payments.

It was terrific advice for someone who lives in a vacuum or on a desert island. It was bad advice for lottery winners.

Arends made some excellent economic points. He said that taking the lump sum now would net more than normal. Many lotteries base their lump sum calculations on U.S. Treasury Bonds rates.

Thanks to Ben Bernanke and his pals at the Federal Reserve, Treasury Bonds are extremely low. If you plan on winning the lottery, make sure to win it this week.

Arends assumed that taxes will be higher in future years. It is a 50/50 guess. I don’t think he has a magic ball. If he does, I want him to help make my Kentucky Derby picks.

Arends noted that taking the lottery payments over 20 years would net a 5.7 percent rate of return. In a year when the stock markets is in free fall and foreclosures are everywhere, 5.7 percent doesn’t sound so bad. Not to Anders. He had one word to describe it to describe the 20-year payout.

Yuck.

I can’t find much about Arends so I don’t know if he knows any actual lottery winner. I do. I grew up around gamblers. Arends wrote a book about sports betting, so he must know something about the breed.

Lottery winners are the last people to be getting a lump sum. It is like giving opium to a drug addict.

Look at the history of people who have won the lottery.

With lottery winners, the primary concern is to keep them from running through the money.

Like Will Rogers said, “It is not return ON my money, but return OF my money, that I am most interested in.

A 5.7 percent rate of return would look good to those who blew their lottery lump sum. Right now, they have zero.

There seems to be a disconnect between people on Wall Street and people who live in the real world. A good example is the products they created to package subprime mortgages. They were supposed to bump up returns. Instead, they lost billions.

I’ve spent the past 25 years working with people who get large lump sums. I’ve watched hundreds blow through every dime.

I often use payout annuities to keep people away from their worst enemy — themselves.

The people on Wall Street don’t get it.

I spent many years affiliated with a financial company based in New York. About once a month, some Ivy League MBA would fire off a memo outlining some complicated and convoluted investment scheme.

Their plan would propose a greater return than some complicated and convoluted plan that a competitor was offering.

I threw the memos in the trash. I never saw one that showed me how to stop people from going on wild spending sprees. That was the real problem.

If Jack Whitaker had taken the Powerball prize over 20 years, he wouldn’t have had $600,000 in cash when he was robbed at a strip club. If David Edwards had taken his $27 million jackpot in annual payments, he might not have been evicted from his house and been found living in storage bin.

I suggest annual payments for one reason. If a person runs through the money in the first year, they get 19 more chances to get it right.

The biography of Arends said that he had been living in London. The one in England, not in Kentucky. He might have missed an idea called dollar cost averaging.

The concept is simple. Instead of dropping all your money in the market at once, you invest over time, like on a weekly or monthly basis.

The returns are almost always better than trying to time the market.

The annual payments from the lottery set up perfectly for dollar cost averaging. If a person was smart and invested each year, the ultimate returns would not cause an observer to say “yuck.”

The worst encouragement a lottery winner can get would be to take the money and run.

Don McNay is the chairman of the board for McNay Settlement Group and the author of “Son of a Son of a Gambler: Winners, Losers and What To Do When You Win The Lottery.” You can write to him at don@donmcnay.com or read his award-winning column at www.donmcnay.com.

        

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