Managing a Windfall Requires Planning, Good Advice
Rose Marie Lajoie hadn’t trouble balancing her own checkbook. It was the $10-million windfall that required the reinforcements.
Eight years ago, Lajoie was picking up the pieces after her divorce when she won lottery payments of $500,000 annually for 20 years. After paying taxes on the first installment, Lajoie, who lived in a two-bedroom bungalow and worked in Chrysler Corp.’s Livonia, Mich., office, did some celebrating before settling down to manage the prize.
First there was the party at her office, then trips to Hawaii and Europe.
“It was awesome,” said Lajoie, who later bought a van and “enjoyed spending time with the family,” including her mother, sister, nephew and niece who went along on her travels.
After putting half in bank certificates of deposit, Lajoie started to study the rules of investing.
Now 52 and living in Florida, she admits to some mistakes.
“I got burned at the start,” she said. “It’s a very big process to do it right. I consider it a form of going back to school.”
At first, an accounting firm gave her bad advice. “I got rid of them, $6,000 later,” Lajoie said.
“That’s why I’m careful now,” she added.
And Lajoie isn’t shy about asking questions. “I have to understand, even if it takes 20 times to explain,” she said. “The rules are always changing.”
Lajoie has learned a lot. She has the resources to promote a rhythm and blues band called the Mambo Brothers. Now, though, she also puts $100,000 a year into investments, using the so-called pyramid approach, with the conservative holdings such as zero-coupon bonds and annuities at the base, blue chip stocks in the center, and riskier securities such as gold stocks at the top.
She checks her holdings with several brokerage firms from time to time, and so far she’s had good reviews.
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Whether it’s an inheritance, early retirement package or jackpot, managing a windfall is a complicated process for the average person.
Take George Dunnigan, a retired New York City accountant who had a few financial mishaps after selling his taxi-medallion business five years ago to avoid industry changes that could have reduced its value.
“Every stockbroker in New York started calling me,” Dunnigan said. He politely put them off, set aside taxes on the sum and began figuring what to do next.
Dunnigan put some of the cash into certificates of deposit at a bank that later went bust, losing the $2,500 that wasn’t covered by government insurance. Then, he lost about $6,000 to a broker who contacted him through cold calling.
Dunnigan said he has since struck up a good rapport with a Smith Barney Inc. broker he met on a plane en route to a ski trip. The broker recently pitched a debt-like preferred stock by Travelers/Aetna Property Casualty Co. yielding more than 8%.
Dunnigan, 56, spends two hours a day reading financial newspapers, newsletters such as Steven Leeb’s monthly stock letter and watching business reports.
He has fashioned a portfolio that consists of 38% blue chip stocks and mutual funds, 7% real estate, 5% bonds, and the rest in such liquid assets as Treasury bills.
Pete Caleca, who won the lottery two years ago, gave some of his winnings to a broker with a large firm who later quit and left his account to languish. “It was supposed to be a growth and income fund, but wasn’t doing anything,” the Brooklyn resident said.
The former gas station owner was then contemplating putting his cash in CDs, which were yielding about 4.25%, because he said he “didn’t know any better.”
Then Caleca found Merrill Lynch & Co. financial consultant Danielle Donello, who specializes in educating folks about investments.
“You’re supposed to educate people so they can make decisions, not just jump at the latest products financial consultants are touting today,” she said.
Caleca appreciates that Donello explains things. If she selects some mutual funds, for instance, she gives him a Morningstar report, which describes the fund and how it stacks up against others in its group.
The lottery winner has changed his mind about investing in bank CDs. Instead, he placed $75,000 in growth and income stocks, which gained 23% in less than six months.
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Most average folks, not trained to handle so much cash, need guidance. “You have to get a good advisory team right away,” said Rich Holman, editor of “Lottoworld Magazine,” based in Naples, Fla.
Holman recommends interviewing attorneys, financial planners, accountants and insurance specialists--at least three from each category--and then selecting one from each.
Set up a living trust, as well as a trust that spells out what goes to family members if you die, Holman said, and an insurance policy to pay estate taxes so heirs aren’t left with a tax bill.
Sometimes, the toughest part about advising people who have come into a big payout is convincing them to put some aside.
“The first thought most people have is how much can it throw off that I can spend,” said John Bean, a certified financial planner at First Union Bank in Charlotte, N.C., who counsels recipients of large cash amounts, such as lottery winners and professional athletes.
“The goal is to carve out a piece of this income and invest it so that when the money runs out, we have an investment pool that’s going to throw off income to live off.”
It’s also important to figure out your new tax bracket, said attorney Julian Block, whose book, “Julian Block’s Tax Avoidance Secrets,” in its 13th edition this year, offers guidance on tax treatment of everything from inheritances to divorce settlements to early retirement packages.
Opinions differ about whether it’s best to choose a financial advisor who charges a flat fee, or a broker who charges commissions based on the buying and selling of securities.
Investors should own a mix of financial products, said Peter Benzi, president of Chase Manhattan Investment Services, whether it’s through a big Wall Street firm or a local bank,. “By mixing categories such as bonds, stocks and other assets,” he said, “you start to create diversification.”
