Cash windfall can lead to downfall

Szifra is quoted in the Merrimack Valley Eagle-Tribune

By Bill Kirk and Emily Young

October 28, 2007

For Lisa Arcand, winning $1 million in the lottery helped make her dreams come true. Or so she thought.

She took the earnings and bought a house and new furniture, went on a couple of vacations, enrolled her son in Central Catholic and opened a restaurant on Merrimack Street in Lawrence.

Then reality struck.

“Winning the lottery is not all it’s cracked up to be,” said Arcand, 42, a single mom and lifelong Lawrence resident. “Actually, it’s been very depressing.”

Today, less than four years after striking it rich on a scratch ticket, Arcand has decided to close her dream business — Fisherman’s Corner.

“I emptied my savings to get this place,” she said last month, standing behind the counter of the nearly empty eatery she opened just five months ago. “Now I’m behind on my bills.”

Unfortunately, Arcand’s story is a familiar one.

Many lottery winners end up worse off than they were before they won, says Susan Bradley, a certified financial planner who runs a practice specializing in helping people who come into sudden wealth.

“A lot of people who win are financially OK when they win,” said Bradley, who also runs a Web site called “You hope they become really financially secure after they win. But many are in a worse position after winning because of financial commitments. It’s not unusual for them to start borrowing, and that’s how you get more into debt.”

Roughly one-third of lottery winners find themselves in serious financial trouble or bankrupt within five years of turning in their lucky numbers, according to Chelmsford wealth counselor Szifra Birke.

“For many people who come into wealth suddenly — whether they win the lottery, receive an insurance settlement or an unexpected inheritance — if they have not acquired good money skills prior to this windfall, often they struggle and make poor choices,” Birke said.

“If someone is in trouble financially, if they’re spending more than they are making or are relying emotionally on the lottery to bail them out, then that’s a big problem.”

Advice, good and bad, abounds

Financial windfall coupled with reckless buying and no concept of money almost always leads to trouble. This is especially true for people who decide to use their winnings to create a new business, said Birke, a psychologist on retainer with Lexington Wealth Management.

“If a person is not business savvy, they don’t know what it takes to run a business — $300,000 could disappear very quickly,” Birke said.

“You have to really understand the true cost of things. If you make a purchase (on your credit card) that costs $50 and it takes you two years to pay it off, you spent a lot more than $50. Sometimes people just don’t compute the numbers.”

The best thing to do is to hire someone with expertise handling money, said Robert Glovsky, director of Boston University’s Program for Financial Planners and president at Mintz Levin Financial Advisors.

“On the positive side, the lottery allows winners to do things they could never do before, whether it’s consumption or charity,” Glovsky said. “But what happens when the money runs out? Do they return to their old lifestyle? I would think that would be very difficult.”

A financial advisor, he said, can help put the realities into perspective.

Arcand could probably have used that advice, but instead of calling a financial advisor, she was contacted by a company that actually takes money away from lottery winners.

Soon after winning in April 2004, Arcand said she was aggressively pursued by Stone Street Capital, a financial services company that offered her a lump sum of money up front in return for all or a portion of her $35,000-a-year lottery proceeds.

“They call people who hit the lottery and offer to buy the ticket off you,” she said. “The offer was less than half the cash value. But I sold a piece of it — $15,000 a year, and I got $200,000 up front.”

The up-front money helped her buy some of the things she’d never been able to afford, but it also put her in a higher tax bracket, leading to a further erosion of her winnings.

“They don’t tell you all this,” she said. “You end up with this little bit of money, and then you lose.”

Stone Street Capital vice president David Lewis did not return phone calls, but the company’s Web site makes it clear what the Bethesda, Md.-based firm is all about.

“Free Quote, call 1-800-LUMP-SUM,” the home page states. A link brings visitors to a page that offers a variety of options for turning 20 years of lottery payments into quick cash.

“Convert your lottery winnings or contest payments into immediate, lump sum money!” shouts the Web site. “Our services are designed to fit the unique financial needs of lottery and contest winners by giving them lump sum payments instead of their current periodic payments. This means you can get the money you need in your bank account in one complete payment and enjoy the financial rewards now!”

The site encourages winners to sign up for a free quote.

Dan Rosenfeld, spokesman for the Massachusetts State Lottery, said the state knows about these companies and advises winners to be wary of dealing with them, or anyone else, for that matter.

“We have a whole list of groups that will buy your winnings,” Rosenfeld said. “We say, ‘Be careful, and only talk to who you want to talk to.’”

When lottery winners come in to collect their prizes, they are taken into a room called “The Winners’ Circle,” where lottery officials talk to them about how to manage their new-found money.

“Sometimes the winners listen, and sometimes they don’t,” he said. “Our customer service people talk to them about the folks who are going to call them on the phone and will try to get them to sell their ticket.”

The primary message from lottery employees to winners is this: Get a lawyer.

Bradley, of Sudden Money, would add another: Get a certified financial advisor.

“You win, you’re excited, you don’t sleep for four days,” she said. “You are sleep deprived by the time you decide how to take the money” — whether in annual payments or as a lump sum, if the choice is available. Some games, like the one Arcand won, don’t have that option and must be taken as an annual payment.

“Most people who win the lottery don’t have lawyers, accountants or financial planners,” she said. But quite often someone they know steps forward and acts as “the gatekeeper.” Unfortunately, that person rarely has the necessary expertise to manage large amounts of money.

“If you start off on the wrong foot, it’s hard to catch up,” she said. “The first six months are tough. People make commitments to themselves and other people.”

The right way and the wrong way

Peabody resident Paul O’Connor seems to have gotten it right.

He won $1 million on a scratch ticket in October 2002, but rather than spend the money he called a financial advisor and decided to live frugally.

O’Connor, 62, walked away with $35,000 a year for 20 years, but he kept his job as a technician at General Electric for roughly a year. After speaking with a financial advisor, O’Connor retired at 58 on his lottery winnings and pension.

The only thing he splurged on was a new Ford pickup truck. He still lives in the same one-bedroom apartment he has for the past 17 years.

“I still shop in the same stores,” he said. “There is that temptation for some people to go crazy, but you have to just live within your means. That’s the whole thing. When you win the lottery, you have to use your smarts about it because there is a lot of temptation.”

O’Connor, who still has another 15 annual payments coming, said that comfort is enough for him.

“I have a roof over my head and food on my table. Between the lottery and my pension, it’s enough to live on,” he said. “You’re comfortable.”

When Arcand won, however, her enthusiasm got the best of her. One of the first things she did was throw a party for friends and family, and it rapidly spiraled out of control.

“I spent $3,000 on a party at Mill City — there were 20 of us and people were ordering $200 bottles of wine,” she said. “I was kind of mad.”

And she didn’t hire a financial planner.

“I talked to a few people, but determined that putting money away wasn’t worth it,” she said.

And she kept spending.

She bought a house, went to Florida for vacation, got new furniture and bought a plasma TV, she said. Plus, she got her son into Central Catholic at a cost of $10,000 a year.

Then she decided to open the restaurant.

She had about $50,000 in a savings account, which she put into the restaurant, including a lease and renovations — mostly “elbow grease” on her part, she said.

She had always thought about opening a seafood restaurant, she said, especially since Langford’s on South Union street closed about 10 years ago.

“There’s no seafood place in this area,” she said. “There are a million pizza places, breakfast joints and sub shops, but no seafood.”

She opened in May of this year. Things started out slow — and stayed that way.

“It didn’t go as well as I thought,” she said, adding that at one point last month she wasn’t sure she could hold onto the restaurant until her next lottery payment in April.

She was right to have doubts. She recently pulled the plug on the restaurant she worked so hard to build.

“I’m getting out of the (two-year) lease, I can’t sink any more money into it,” she said. “I put a lot of time and energy and wasted money that I’m not going to get back. I gave it a shot. It didn’t work out. Oh well.”