It's not unheard of to read about people like Jeff Clark of Saskatchewan, a winner of two jackpots totalling $3-million, who spent the fortune on gambling, fast cars and luxuries. But financial experts say you can avoid blowing your windfall.
The five government-owned corporations that run the lotteries across the country publish their own literature, which they hand winners before they walk out of the prize office with that fat cheque.
First, do absolutely nothing with the money for at least three to six months other than to park it in an interest-bearing bank account or government treasury bill.
Second, get away for a few weeks from the prying eyes of the media, relatives and co-workers to think about what you've just landed. And third, find a financial expert.
"That can be the most important decision that you make," said Ron Zaporzan, a manager at Investors Group.
Hazel Sundby, a $10-million winner in May, said she has a financial adviser and isn't making any rash decisions: "We're going to think about it over the winter and decide what we're going to do."
In many ways, you're effectively running a business called Me Inc., which means you've got to set up a structure and hire an expert or a team of professionals, such as a financial adviser, a lawyer and an accountant to help manage the money, said David Stewart, a partner at Toronto-based Stewart & Kett Financial Advisors Inc.
"You're going to have to set some targets," Mr. Stewart said. "What kind of investment policy is there going to be? What kind of returns should you be expecting to get on your portfolio? How are you going to track how well someone is doing for you, and when do you keep or get rid of somebody?"
Jim Rogers, chairman of Vancouver-based Rogers Group Financial Advisors Ltd., recommended that you look for someone preferably with a Certified Financial Planner designation, lots of years of financial experience, and who has previously dealt with lottery winners.
Referrals from a trusted friend who has been astute about her own money matters can be a good idea, but they may not always work out, as Vito and Sabrina Palmieri of Woodbridge, Ont., discovered. The couple won $19.6-million almost two years ago in a Super 7 draw and retained Toronto lawyer Devendranauth Misir after a family friend made the recommendation. But they are now suing him in Ontario for allegedly losing nearly $5-million over several investments.
Web sites that can help you find a financial adviser include http://www.cfp-ca.org by the Financial Planners Standards Council (FPSC) and http://www.advocis.ca by the Financial Advisors Association of Canada, he said. Stewart & Kett also offers clients a service that helps them find money managers based on qualitative and quantitative criteria, Mr. Stewart said.
In any event, you should interview at least three potential financial planners to find out if they'll suit your needs. Ask about their work experience and credentials, find out how they're paid, which should be followed up in writing, and get several references of individuals who are or have been clients, Mr. Rogers said.
Ten questions to ask potential financial advisers on the FPSC site and Advocis's booklet, "How to chose and profit from a financial advisor," are worth checking out.
After an expert has been hired, that person will help prepare a detailed plan for you. Part of that plan will consist of developing an investment policy statement based on the answers you will have provided about your investment style and risk tolerance, Mr. Rogers said.
For a 51-year-old woman who won more than $2-million, Mr. Rogers said he helped set up an annuity for her aging parents so that it could supplement their retirement incomes. She also helped pay off their mortgage and invested the rest of her winnings in equities, fixed income and cash and cash equivalents, which she could easily tap to buy luxury items and pay for cruises, he said.
In drawing up a financial plan, Carolyn Williams, a fee-only financial planner in St. John's, suggested that you write down your goals in addition to filling out net worth and cash-flow statements to get a snapshot of your life. You may learn that you want to travel with the kids for a year, change careers, retire early or start a business, she said. All of that should also be reviewed once a year, she said.
Your immediate priority should be to pay off the mortgage and other forms of debt, such as car loans, lines of credit and other consumer loans, experts said. Canadians are very conservative, according to the Ontario Lottery and Gaming Corp. Surveys of winners showed that 92 per cent of respondents sought financial advice, while only 10 per cent quit their job, retired, changed careers, opened their own business or returned to school.
Maximizing your RRSP contributions, setting up registered education savings plans (RESPs) and donating to charities are good ideas, Ms. Williams said. In Canada, lottery prizes are tax free but the income earned from interest-bearing accounts or from investing are subject to taxes. You can still pay fewer taxes on other earned income for the year if you contribute to RRSPs, she said.
If you have children, you may want to set up a RESP or create an account in trust for a child under 18 and invest in financial vehicles that give capital gains, such as stocks and mutual funds, she said.
If you give money to a registered charity you'll be eligible for a credit on your income taxes, she said.
As for investments, you will need to devise a strategy, she said, keeping in mind, "you should always put your interest income inside your RRSPs and keep your equities outside" because dividends and capital gains are taxed at a lower rate.
If you've decided to invest $500,000, for example, in stocks and fixed income securities, she recommended creating a five-year ladder of guaranteed investment certificates (GIC) with half of it. That means putting $50,000 in a one-year term, investing another $50,000 in a two-year term and so on so that they're staggered. Then you roll each one as it matures into a five-year GIC so that you're hedging the ups and downs of interest rates and maximizing five-year returns, Ms. Williams said. For the equity portion of that portfolio example, she suggested investing in two to three high-yield dividend stocks, such as gas and electrical utilities and bank stocks and in an equal number of global funds.
Macdonald Shymko & Co. Ltd. in Vancouver advised a man and his wife who won $800,000 about a decade ago. David Shymko, a partner and financial planner, said his company recommended they invest in Mutual Fund Limited Partnerships, which entitle holders to initial tax write-offs and a stream of future income. In that example, the man also knew he was dying so a discretionary testamentary trust, an estate planning tool, was set up to keep taxes low for his surviving wife, he said.
No matter the situation, experts say it's important for lottery winners to have fun with their wealth. So go ahead and buy that Bimmer or take that exotic trip to Africa.
"In general, it's important to give people a reasonable chunk of their winnings to quite frankly blow because if they don't have that outlet they won't feel like they've won anything," Mr. Rogers said.
Windfall strategies
Tips to avoid a big headache over your windfall
First, do nothing. Take a leave of absence or short vacation to give yourself the time and space you need to help plan your sudden wealth.
Critically review your support system. You will need an objective, professional financial adviser to help co-ordinate the tax, legal and estate planning professionals you will come to depend on.
For the first 90 days, put the money in a safe, accessible interest-bearing investment, while you are developing your plans.
Consider your goals in light of your values, what you enjoy and what you do best.
Be prepared for the increased attention you will receive from relatives and new "friends."
Get an unlisted phone number, a post office box and a home security system. You may eventually have to move in order to avoid the barrage of offers and requests that will inevitably swamp you. If you do move, do not file a "change of address" notice with Canada Post.
Have some fun. Take a small part of your windfall and splurge - treat yourself to a spending spree to get it out of your system.
Finally, remember the old adage, "Money can't buy happiness."
SOURCE: INVESTORS GROUP
