I'M Rich! - Now What?

Kiplinger's Personal Finance Magazine, Nov, 2000 by Kristin Davis

TRENDS -- If you fall into a sea or GREEN, take a deep breath and call for help.

JOHN CARPENTER was so confident of his final answer to Regis Philbin's million-dollar question (Nixon was the U.S. president who appeared on Laugh-In) that he used a lifeline to call his father "just to let you know I'm going to win the million dollars." And Carpenter was equally cool five months later when he paid the $400,000 tax bite on his winnings. "I wasn't too shocked when I saw the bill," says Carpenter, then a revenue officer for the IRS.

During a three-week vacation he contemplated leaving the IRS "and doing something fun." His wife, Debbie, did quit her job as a bank manager. "But after the euphoria wore off, she went back part-time," says Carpenter. And a year later he's still with the IRS, now as special-procedures adviser. He commutes to work in a new BMW 528i from a slightly bigger house in Hamden, Conn., but "after the taxes, it's not change-your-life kind of money if you want to eat every day," says Carpenter.

The first weeks (or months) after a windfall are critical. "If you make it past the initial state of euphoria, you're going to be okay," says Joel Bruckenstein, a financial planner in Pleasantville, N.Y. Unfortunately, many of the newly rich--whether they hit the jackpot with stock options, a lottery ticket, a lawsuit settlement or game-show winnings--let short-term celebration sabotage the opportunity for lifelong financial freedom.

"I've had clients who made $5 million on stock options come in and tell me they've bought a $1.5-million house," says John Henry McDonald, an Austin, Tex., financial planner. But they neglected to calculate the cost of living in such a palace--property taxes, country-club dues that go with the lot, staff to do landscaping and cleaning--or even to factor in taxes. "If you have $1.8 million left [after the house and the income taxes] and it's costing you $500,000 a year to live, you're in big trouble if you're making only $70,000 a year," says McDonald.

More people squander windfalls than use them wisely, which leads financial planners almost uniformly to offer some draconian advice: Except for paying your taxes, do nothing with newfound wealth for six months to a year. Don't even begin investing it right away. Just leave it in a money-market account until the big numbers are no big deal anymore, and you have had time to work through the emotions that usually accompany a sudden catapult into wealth. It may take even longer to come to grips with a financial gain if it results from a personal loss, such as a divorce settlement, accident settlement or inheritance after a loved one's death.

Speaking from experience, financial planner Nancy Frank of New York City is sympathetic to the spendthrift impulse in people who hit the jackpot. She would let you take 1% of the windfall and splurge on something, then sort out what you can do with the rest of the money. Frank, a two-time beneficiary herself, took a trip to Paris after an aunt left her a six-figure bequest and bought an expensive pair of shoes after she inherited money from her father's estate.

There's a long learning curve when you don't know what your boundaries are, says Susan Bradley, author of Sudden Money: Managing a Financial Windfall (John Wiley & Sons, $24.95). While you figure out how rich you really are, don't quit your job, travel around the world, or lavish gifts on your family and friends. "The last thing you want is to be ten years into an enjoyable retirement and then find out you have to go back to work," says Bradley.

Some things do need to be taken care of right away. You may have to file court documents or change the title on accounts. You'll need to figure out what your tax liability is and set aside money to pay it. (Lottery commissions, for instance, typically withhold 28% of your prize, but big winners often owe additional money at tax time.) You may need to write a will or pay off high-interest credit card debt. And you probably want to start scouting out good advisers.

New headaches

YOU THINK THAT if you have plenty of money you won't have problems," says David Pearson, who won Indiana's Hoosier Lottery in June 1999. "But you've still got problems. They're just a different kind." When Pearson hit the $42-million jackpot, he was six weeks away from being unemployed; the dairy plant where he'd worked for 30 years was about to close. Today, he says that managing the money has become a job in itself--and a lot more work than he ever imagined.

Instead of a stream of annual payments totaling $42 million, Pearson chose to take his winnings in a lump sum worth a bit more than half the annuity value, or $22.7 million. After taxes were withheld, he pocketed $16.3 million, from which he paid another $2 million in taxes this spring. With $14 million, "you'd think you wouldn't have to do anything," says Pearson. "But you have to make a lot of decisions."

He and his wife, Elaine, met with lawyers and financial advisers as often as three times a week in the months following their big win. They finally settled on a team of five--a lawyer, two investment advisers, a trust adviser and an accountant--and have spent perhaps $20,000 to $25,000 on financial advice in the past year.