We all know that more money does not automatically translate into more happiness. Unfortunately, that knowledge tends to be an abstract, intellectual one. Too often we find ourselves pursuing material gain with unrealistic expectations as to its ability to fulfill our wants, needs, desires, and dreams. We operate on autopilot, not fully articulating our thought process or reflecting on past experiences to mine them for lessons learned from past goal pursuit and attainment and lasting satisfaction.
All this musing is prompted by the late January 2010 reporting of the death of a 2006 $30,000,000 Florida lottery winner. His body was found buried 5 feet beneath a 30 x 30 slab of concrete in the back yard of a woman who had recently “befriended” him. Foul play is suspected.
“I’d been better off broke,” he was quoted as having said repeatedly. “I thought all these people were my friends but then I realized all they want is just money.”
“Extremely generous with his new found wealth…a string of bad choices” followed, leading him to wish he had never bought the winning ticket.
It is easy for someone who has not walked in his shoes to blithely believe we would make better choices, handle the sudden fame and wealth more astutely. Perhaps we would but in one form or another, to one degree or another, the same issues and pressures would beset us all. Everything has a price, it is a rare benefit that does not come with some need for discipline, some need for care.
Indeed, wealth management, like most other life skills, is a learned ability that is best cultivated over time. Few, if any, are born with it and natural talents of any kind can be measurably improved with diligent study, practice, and effort. The best money managers are those who created their own prosperity over a lifetime and in the process gradually learned the skill of wise husbandry. One of the pitfalls of well-intended low down payment or no down payment home ownership plans is that there is a high correlation between the financial skill set necessary to own a property and the skill set of financial discipline and planning necessary to build up a nest egg for a down payment.
And by the way; $30,000,000 in lottery winnings is a lot of money but it is far from the limitless wealth most people think it might be. It really won’t set you up for an endless participation in the “Lifestyles of the Rich and Famous.”
Let’s do the math. First off, when you win $30,000,000 in a lottery you don’t get $30,000,000 all at once. You can receive something like an annuity of $1,000,000 a year for 30 years. Since the imputed interest rate is relatively low, generally 4% to 5% these days, most people chose to take a lump sum payment. In this case it was $17,000,000, still a lot of money. However, Uncle Sam stands ready to take his cut, say 35% in this case. This leaves us with $11,000,000. Still a wonderful sum. But we want to be careful, we want to preserve our capital. It must be invested to yield an annual income. Let’s say we are 40, like our lottery winner, and have a life expectancy of another 45 to 50 years. We may not live quite that long but boy, oh boy, the down side of running out of money is great. We don’t want to be 86 and broke and on the street.
Quite frankly, if you want to invest safely for the long haul, you will be lucky to net a 7.5% return over the decades. Remember the low return on the annuity? If you wish to truly preserve your capital in real terms, post inflation, you must reinvest every year the portion of your annual return that is due to inflation. So if inflation is 2.5% a year, your real return is 5%. On $11,000,000 of capital, that is $550,000 a year. By all indications, federal tax rates are about to increase to 40% in order to pay for the “big bank bailout and bonus bonanza,” so that comes to $220,000 in taxes a year, leaving our $30 million lottery winner $330,000 a year to live on. Not bad, not bad at all, but far from unlimited wealth. (You can goose these numbers a bit by trying to spend your capital down, not returning the inflation portion, but that only nets you $500,000 annually. Nice, very nice, but don’t try to buy a private jet. Or support all your relatives. Or invest in wild flyers or start ups).
Enjoy your life, count your blessings, live each day with an attitude of gratitude.
And remember: The grass is usually greener on the other side of the fence because it has more BS on it!