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When Your Ship Comes In --- Lottery, Signing Bonus, Inheritance, Etc.

Submitted by Steve Selengut | RSS Feed | Add Comment | Bookmark Me!

Lottery winners, professional athletes, celebrity varietals, and windfall recipients in general have at least one thing in common --- and it isn't their extraordinary luck or talent. Far too many wind up wondering where all the money went and how it disappeared so quickly. 

How could anyone actually squander a hundred million dollars? Well, it seems to happen frequently.

Yes, it could be the government's fault. In the backasswards, post Dodd-Frank world of oppressive regulation, only those totally unqualified to give investment advice are actually permitted to do so without federal Gestapo-esque oversight.

By the time a generally common sense article (like this one) winds its way through the approval process, it is either out of date or watered down into near total uselessness. In the meantime, the media, gold bugs, options & futures hucksters, and MPT theorists run rampant, with unregulated free reign to herd generations of lemmings to the cliffs....

So, please do not pay any attention to this commentary, penned as it is by someone with forty three years of hands on investment experience.

When your ship comes in, whatever the size, source, or tax ramifications, make sure you get your captain's license before starting the engines. If you are not educated, take some on-line management, investment, and economics courses --- light bulbs will start to flash with every chapter you ingest. 

If you are a liberal, sit back and appreciate how much good work your governments will do with their 50% share of your money. Managing your good fortune could be harder than you may realize, so why not just give it all away now so you can remain within your political comfort zone. 

On the other hand, we could use you in the hated 10%. Welcome.

Here are some skill sets to master when you should never have to work another day in your life (NHTWADIYL).

Planning:

Plan to survive on the income produced by an investment portfolio you will create once all the legal and tax ramification dust settles --- don't "bird" the boss before you have your income machine up and running.

At the moment, you can generate tax free income in excess of $55,000 per year per million you invest --- up to $75,000 or more from taxable sources. These are conservative numbers, generated by a diversified group of managed, publically traded, income portfolios --- sorry, no specifics allowed here....

Chapter 5 of "The Brainwashing of the American Investor" (What Your Mother Never Told You About Income Investing) will help you get your income portfolio up and running quickly.

There is no need to have any money invested in the stock market, but the Market Cycle Investment Management methodology described in "Brainwashing" will help you handle that adventure with much less risk. You would be smart to have a 60% Equity MCIM portfolio around to use as a benchmark for the other ventures you undoubtedly will become involved with.

If you spend less than 70% of the income, this portfolio will be running smoothly for generations to come --- you may want to hire a professional to do the managing so that you can focus on other matters. So, if your windfall is in the NHTWADIYL neighborhood ($10 million or so), you can lose or give away the rest, but why would you? 

Allow no forms of speculation in the NHTWADIYL, including: options, indices, futures, metals, hedges, etc

Organizing:

Prioritize your "bucket" and "friends/family/charity" lists so that you can deal with each of them systematically. There are tax wise and "spendthrift" ways of giving money away; keep clear records as recipient memories tend to be short and blurry.

Don't lose sight of the costs associated with the luxuries you obtain: homes, toys, vehicles, posses, etc. all have carrying costs. It would be wise to establish separate income investment accounts to fund all new and probably unessential acquisitions.

The NHTWADIYL portfolio is sacred. Never, ever, budget more than 70% of the income --- you are not a government entity, and you can't raise taxes to fund your failures.

Leading:

You are the Captain of your financial ship. You must manage the professionals you will need to run your empire productively. Beware of venture propositions that are based on your money only. When choosing advisors in all areas, avoid the big and the blustery; the lean, less well known, and appreciative of your business will serve you better --- become someone's biggest client. You should never, ever, be buying me dinner.

There is no need to rush into anything, especially real estate, new businesses, and exotic financial panaceas. Never own a restaurant, a yacht, or a jet plane, and  avoid power-of-attorney arrangements, annuities, and life insurance --- if you need the latter two, you've gone astray. 

If you don't understand it completely, it's not for you, absolutely.

Set limits on risk, based on principles of Quality, Diversification, and Income generation --- allow no investments (that's none, nadda) that do not generate income and own no investment (or holding) that has a cost basis greater than 5% of total Working Capital (Read: The Working Capital Model).

Controlling:

Rotate your employees between jobs, hire an outside auditor (a different firm every year), and fire any manager who does not operate below budget. Do everything in writing, and with younger witnesses.

There should be no "debt" whatsoever in your personal, long term, financial mix --- never be the co-signee for anyone or go alone into any venture proposed by others.

Visit with your NHTWADIYL portfolio investment manager regularly and monitor the "base income", not the Market Value.

Make sure you are generating realized net income in excess of $35,000 per invested million outside the NHTWADIYL portfolio --- make changes in portfolios where that is not being accomplished.

----------------

Twenty six years ago this month, an accountant introduced me to a 3.5 Million Dollar (net) lottery winner. Twenty five after-tax installments of roughly $140,000 were the prize; the first three had resulted in an IRA of about $5,000.

Today, three market meltdowns and expenditures of roughly $2.6 million later, approximately $2 million in assets remain... it wasn't easy.


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