The book Luck of the Draw: True-Life Tales of Lottery Winners & Losers by Chris Gudgeon and Barbara Stewart is a fun read, but it contains some very bad financial advice.
This book is packed with funny and strange stories about lottery winners, but it may not be very good for the financial health of people inclined to buy lottery tickets. One unavoidable problem with a book like this is that reading about a new lottery winner on each page creates the impression that winning the lottery is common. It is exceedingly rare. You won’t win the lottery.
Many of the stories discussed whether or not the winners would quit their jobs, even with modest-sized wins like a few hundred thousand dollars. This is not enough to retire on. Perhaps $2 million would be enough if the winner invests wisely and lives a middle class lifestyle without excessive spending. But how likely is that? Winners tend to splurge with plenty of help from family and friends.
Page 60 contains advice supposedly from an actual financial planner. Here are some spectacularly bad tips for a lottery winner:
1. Move somewhere like the Bahamas where taxes are lower. So, now that you have a lot of money, you should leave family and friends to save money? I’d rather stick with doing things that make me happy. If you’ve always wanted to move, go for it, but moving just for tax reasons is crazy.
2. Divide your win among family and friends so that investment returns will be taxed in lower tax brackets. So, if you win money, you should give it all away so that you won’t be rich and won’t have to pay so much tax. I can see where your family and friends might like this one.
3. Go crazy and spend all the money fast to avoid paying tax on investment returns. Great idea. You should lick metal poles in the winter, too.
I have my own idea. Take the money you were planning to spend on lottery tickets and put it in a savings account. Each year put the money into a low cost index fund. After 25 years, look at the account balance in the fund. You’ll find that it looks like a modest-sized lottery win.