So you won the lottery? Here's how NOT to go broke

A Vancouver man who struck it rich with a lottery ticket is suing his former investment adviser for what he claims were moves that caused him to lose half his winnings.

Mohammed Shakil Khan played Lotto 6/49 in 2007 and won $4 million. In a lawsuit filed in B.C. Supreme Court, he alleges Catherine Jones lost him $2.3 million through “reckless and/or unsound” investment strategies.

Clearly, hitting the jackpot should never be considered a financial plan. Even when there isn’t an unscrupulous adviser involved, lottery winners can trigger their own downfall.

Research has shown that many people who win between $50,000 and $150,000 do nothing to pay off their debt or increase equity in new or existing assets. A study published in The Review of Economics and Statistics in 2010, for instance, found that more than 1,900 of 35,000 winners in Florida between 1993 and 2002 declared bankruptcy within five years.

If you do happen to have incredible luck, there are ways to properly deal with a windfall.

Take a deep breath and plan

The initial step, financial experts agree, is to not make any sudden moves.

“The first thing I always advise people is to step back and reevaluate their whole financial picture,” says Vancouver-based ScotiaMcLeod wealth advisor Rhonda Sherwood.

“Spending the money is not a ‘bad’ thing, but if there is a better way to use it to help you in the future, then think carefully before making any purchases.”

Sophie Blais-Yalbir, senior financial advisor at Calgary’s WealthCo, says a reality check is crucial. For proof, look no further than the tales of some of the participants on the U.S. reality show The Lottery Changed my Life who end up broke despite winning big.

“A million bucks isn’t a lot of money,” Blais-Yalbir says. “If you’re 45 and you’ve got $1 million and you want that to last forever, you need to spend less than 1 to 2 per cent of it a year. That’s $20,000 a year of income. The first thing you need to do is take a deep breath. And meeting with a financial planner is a good thing to do.”

Research your financial advisor

If everyone from your estranged sister to a high school buddy is going to be looking for a handout, you can bet that financial advisors will be all too happy to take you on as a client. As with regular folk, lottery winners need to do their due diligence when it comes to working with one.

“A good financial advisor will spend the time to get to know you and to figure out what your goals and objectives are and look at a larger solution than ‘you just won $10 or $5 million and I want to invest it,’” Blais-Yalbir says.

“You need to align yourself with somebody you trust. Interview people and spend some time with them. What are other clients saying about them? Don’t give any money away until you go through that process.”

Ask too about an advisors’ professional designations (such as whether they’re a certified financial planner), fee structure, and how investments are managed, Sherwood notes.

Be clear about your goals

She says being clear with yourself and a financial advisor about your current financial state and your goals is essential.

“Put to paper everything you own, such as your house, RRSPs, TFSA, investment accounts, and insurance and everything you owe, such as your mortgage, loans, line of credits, credit cards,” Sherwood says. “What are you financial goals in the near term, such as buying a house, travelling, saving for kids’ education and the long term, such as retirement. What strategies do you have in place for achieving these goals? Are you on track?”

The first priority should be paying down debt or getting rid of it altogether, with high-interest debt at the top of the list.

There’s one more thing to consider.

“Change your phone number,” Blais-Yalbir says. “I would imagine you’d want an unlisted number.”

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