The 4 Most Savvy Investments a Powerball Winner Could Make

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If you win a massive lottery jackpot, what should you do with the money? Here are some good options. 

Let’s face it. You aren’t likely to win the Powerball jackpot anytime soon. While it isn’t impossible to win the Powerball (after all, someone has to), you are more likely to become president of the United States or to get struck by a meteorite.

Having said that, it can be fun to dream, and there are some smaller (but still rather massive) lottery prizes that are a little further away from the impossible. So with that in mind, if you were to win a multi-million dollar lottery prize, here are some of the best things you can do with that money immediately to prevent yourself from becoming one of those cautionary tales about a lottery winner that goes broke.

Four savvy investments Powerball winners can make

There are some moves you should definitely make if you win the Powerball, as my colleague Robin Hartill, CFP, discusses. For example, hiring an attorney and planning for taxes are important steps to take.

But what should you do with the money when you get it? Here are just a few of the top choices.

1. High-yield savings accounts or CDs

One important thing to keep in mind is that if you already have several hundred million dollars, you don’t need to swing for the fences. A modest return from a safe investment can be more than sufficient.

As of this writing, some of the best online high-yield savings accounts have APYs of 4.50% or greater. If you win a $1 billion Powerball jackpot, you’d receive a little less than half as a lump-sum payment, and after taxes, you’d be looking at an actual payout of about $300 million, depending on what your state and local tax situation is.

If you put this money into high-yield savings accounts and certificates of deposit (CDs) with an average APY of 4.50%, this would produce $13.5 million in annual income.

Of course, there are some drawbacks. This would be taxable income, for starters, and there’s a solid argument to be made in favor of several other choices. Plus, savings account APYs can fluctuate over time.

2. Take the annuity

If you simply want safe returns, like you’d get from savings accounts and CDs, there’s a good argument to be made that the best choice is to not take a lump-sum payout and instead elect to receive an annuity for the full amount.

With a billion-dollar jackpot, your payments from a 30-year annuity would be around $33 million per year for 30 years, and you’d only pay tax on this income every year — not on a lump-sum payout and then on your interest income.

3. Tax-free bonds

When you have a massive sum of money, taxes become a big consideration when it comes to investments. Even with the preferential treatment of long-term capital gains and dividends, the top tax rate will take a 23.8% bite out of your money. And ordinary income (including interest) is taxed at the top 37% income tax rate for high earners.

The national average for 30-year AAA-rated municipal bonds is 4.10% as of this writing, and while this is less than you can get from high-yield savings accounts, this is tax-free income that is locked in for 30 years.

4. Index funds or stocks

While they aren’t the most stable investment, the reality is that stocks have outperformed every other major asset class when measured over a period of several decades. You don’t need to do anything fancy — a portfolio of basic index funds can be a great way to go.

Hire a financial advisor to make (most of) your investment decisions

As a final thought, I’d argue that the best investment you can make with a massive windfall is to hire a professional to help.

As a Certified Financial Planner, I’m admittedly a bit biased here. However, to be perfectly honest, I’m a pretty well-versed investment professional, and I have graduate-level education in financial planning. And I’m not sure I’d be comfortable managing several hundred million dollars by myself with absolutely no outside guidance. Don’t get me wrong, it would certainly be a good problem to have, but the reality is that many ultra-high-net-worth individuals have a team of people who help them manage their finances.

A financial planner isn’t free. For a full-service planner who will make investment decisions on your behalf, you can expect to pay in the range of 0.5%-1% of the assets under management per year. But paying for a professional who has experience investing for wealthy families can be an excellent strategy, especially if you don’t know what you’re doing. In addition to investment guidance, a competent Certified Financial Planner can also help with estate and tax planning, which would become a big concern if you won the Powerball.

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