Posted 1/16/2012 12:00 am
Updated 11 months ago
Even before she redeemed the $20 Diamond Dazzler lottery ticket worth $1 million earlier this month, Ruth Simcox of Cabot had consulted with a financial adviser, or so she told the director of the Arkansas Scholarship Lottery.
Simcox, the 12th Arkansan to win $1 million or more since the ASL began selling tickets in September 2009, declined to be interviewed by Arkansas Business. But financial advisers say the Arkansas Children’s Hospital nurse did a smart thing by getting professional assistance from the start.
Like the 10 others who won $1 million, Simcox received a payout of $680,000, which is what’s left after 25 percent is withheld for federal taxes and 7 percent for state taxes. (One of those wins is in dispute and the money is in escrow. See Who Should Get a $1 Million Jackpot?.) And another Arkansan appears poised to join the winner’s circle. The ASL announced late Wednesday that a $1 million Powerball ticket was sold at a Kroger in west Little Rock. As of Thursday morning, the winner hadn’t cashed the ticket.
Harold Bailey of Conway is by far the biggest winner so far: He won $25 million from a Powerball game in 2010 and elected to take his winnings in a lump sum of $12.15 million rather than have it paid out over 29 years. After withholding taxes, Bailey walked away with about $8.3 million.
Big wins, the advisers say, especially by people of formerly modest means, are fraught with problems that range from overblown expectations to guilt-inducing relatives with their hands out.
“The first battle that they are going to face is the psychological battle,” said Kristina Bolhouse, vice president of Arkansas Financial Group Inc. of Little Rock. “If they’re not used to dealing with large sums of money, their first thought is not going to be investing their winnings. It will be, ‘What can I do with it?’”
And a little of that might be OK. Wealth manager Barry M. Corkern of Little Rock said he could encourage a winner to use $50,000 for wants.
“But that’s all you get,” Corkern said.
Within months of winning $1 million, Gene Simpson of Independence County did what he had always dreamed of: He took nine family members on a weeklong vacation to Hawaii.
The 73-year-old insurance agent also used money he won in April from a $10 raffle ticket to renovate his home and buy a car for his wife and truck for himself.
“We got everything done that we would ever want,” Simpson told Arkansas Business recently.
Simpson said he never thought about getting financial advice before going on his spending spree.
After selling insurance for more than four decades, Simpson said, he figured he could handle the financial decisions himself.
He said he still had money left, but wouldn’t say how much. “I don’t consider that anybody’s business,” Simpson said.
Randy Wagner of Grubbs won $1 million in August by buying a $1 Powerball ticket and adding a $1 PowerPlay multiplier to it. If he hadn’t kicked in the extra $1 for the multiplier, the winning ticket would have been worth $200,000.
Wagner told the ASL that he planned to buy a new truck, according to an ASL news release. He and his wife also had a strategy to “multiply his winnings through wise investment,” according to the news release.
Wagner declined to comment further. “I’m just a normal guy that doesn’t want to gloat about nothing,” he told Arkansas Business.
Wagner’s wife, Stacy Wagner, vice president of human re-sources at Merchants & Planters Bank of Newport, told Arkansas Business that her family was private and reserved. The Wagners don’t want to gloat about
anything or brag. She said, “We feel the less said about it the better.”
Julie Baldridge, interim director of the ASL, said winners weren’t ad-
vised on how to spend their jackpots. “It would be an unwise risk for the state,” she said.
She said most winners had told
her that they planned to be sensible with their money and not blow it on high-dollar items.
Baldridge also said about 70 percent of the winners didn’t want the ASL to promote their winnings through press releases. They can decline to pose for pictures with the traditional oversized checks. But under the Arkansas Freedom of Information Act, the winner, the amount won and the winner’s hometown have to be made public.
Some lottery winners can’t get their mind around the fact that they won $1 million or more and that it’s theirs, said Steven Danish, a professor of psychology and social and behavioral health at Virginia Commonwealth University who has worked with lottery winners for 25 years.
That’s why a number of the winners quickly deplete their prizes, he said.
In addition, winners are bombarded by friends and relatives looking for handouts. Winners sometimes feel guilty about winning and want to help make other people’s dreams come true, Danish said. “And they can’t.”
Winning also can cause other unforeseen problems, he said.
“If you don’t have dreams or goals that you have planned for your life before you win, winning is just going to screw you up royally because you don’t know what to do,” Danish said.
He said that’s why people end up squandering the money on multiple cars or other items.
Economists studied Florida lottery winners and found that winning between $50,000 and $150,000 didn’t prevent people in financial trouble from filing bankruptcy; it only postponed it.
The winners who already had financial problems were more likely to file for bankruptcy three to five years after winning, according to the study, published in August in The Review of Economics & Statistics.
Economists also found that although the winners could have paid off unsecured debt or increased equity in a new or existing home, they typically did neither.
Several financial advisers told Arkansas Business that the first thing a winner should do is consult with a financial adviser, accountant and an attorney to map out a strategy.
On larger wins — not a mere $1 million — there will be immediate decisions to make, such as choosing to take the winnings in a lump sum or have them spread out over a number of years.
The financial adviser can figure out what’s the best option.
Bolhouse said she would advise a winner to take an annuity rather than a lump sum. But Ed Mahaffy, a principal at ClientFirst Wealth Management LLC of Little Rock, said the team of advisers would have to run the numbers to determine the best option.
“If, for instance, the annuity rate is 5 percent, you (and your team of professionals) may feel that you can do better by investing the cash value lump sum,” Mahaffy said in an email to Arkansas Business. “On the other hand, if the annuity rate is 8 percent, you may be inclined to take the annuity.”
Bailey, who took his Pow-erball win in a lump sum, couldn’t be reached for an interview. But when the Arkansas Democrat-Gazette tried to interview him, a man on Bailey’s property flashed a gun at the reporter and told him to “Get out of here,” according to a Feb. 10, 2010, article.
Financial adviser Stephen McNamara, head of McNamara Financial Planning LLC of Jonesboro, said he would advise lottery winners to stop spending money immediately and put a financial plan in place.
“They feel it’s a large amount and they feel like they can give away large amounts,” McNamara said. “It tends to disappear quickly when you do that.”
He said it was critical for lottery winners to not go shopping for luxury items right away.
“You don’t want to have a huge change to the lifestyle of a millionaire only to find out that it takes more than a million to live like a millionaire,” McNamara said.
Corkern, owner of Barry M. Corkern & Co., said he would demonstrate to winners how taking home $680,000 would impact their fi-nancial goals.
Also on top of the to-do list for Corkern would be determining the client’s previous financial condition.
“It could be that some of those people are 60 days late on their car payment,” he said. “There are some circumstances that cry out that need to be taken care of immediately.”
Mahaffy said that debts should be tackled and a financial team can help determine which ones to pay quickly. The balance would be invested for long-term financial goals.
One option is for a trust to be established so the lottery winner couldn’t have easy access to the money.
And trusts and partnerships could help reduce the tax bill, Mahaffy said in the email.
“A solid financial plan should focus on your risk tolerance and provide a sensible asset allocation — the mixture of stocks, bonds and cash in your portfolio,” he said.
‘It’s a Good Feeling’
Winner Gene Simpson said he planned to continue selling insurance even though he won the lottery. “I love what I do,” he said. “I’ve been doing it 41 years. Why quit?”
He said that winning the lottery, though, has allowed him to pay off his bills and not worry about money. “I wasn’t on the verge of losing the house or
the farm,” Simpson said. “It’s just good to have a cushion.”
He also said that people don’t treat him differently just because he won.
“I’m the same old Gene,” he said. “You’ll never see me acting any different. It’s a good feeling. What else can you say?”