All of the above can happen. Lottery winners are invariably people with little experience in handling extremely large amounts of money.

For most lottery winners, everything about their life changes overnight. They typically take the lump sum prize, giving them immediate access to a fortune, with no guaranteed income beyond that. They quit their job, move to a new town, buy a ridiculously large house/car/boat, and give away expensive gifts, having no experience with proper budgeting. They have no experience investing, but there are long lines of “advisors” who want to tell them how to invest, taking advantage of their naivety. Every personal relationship they have changes.

Bankruptcy is not the only concern. Depression, divorce, and suicide are common among big lottery winners.

To avoid all this, if you someday find yourself in this situation, I would recommend the following:

• As much as possible, try to keep it a secret. (I don’t know how possible this is.)


• For at least the first year, try to change your life as little as possible. Don’t quit your job, don’t move, don’t buy any ridiculous toys, don’t make any risky investments.


• If it is an option, take the annuity prize instead of the lump sum. That way, if you fail at the above advice and spend it all or are scammed out of it, you will have another payment coming next year.

More reading:

• CNBC: Here’s why lottery winners go broke
  


• New York Times, Jan 12, 2016: Dear Powerball Winner: Take Our Advice and Take the Annuity
  

Some causes I can imagine:

• you


• you


• you


• you

The simple fact is, God doesn't make you do stupid things with money.

Anyway, you're on the right track: you know the threat is there, you're asking the question.

It's all about financial education and beliefs

There's a grand unification issue at hand, and it's not strategies to dodge "this money-sink", or "that money-sink". The key issue is financial education. Understanding what money is and can do for you. Yeah, yeah, everyone thinks they know the answer to that, "it can buy me blackjack and hookers" -- and that's the problem. Everyone has an incomplete answer, and so they don't see the other, much more lucrative options available to those with a fuller education.

This is literally the difference between the rich and the poor. The rich believe money attracts more money; the poor believe money is something that only leaves their hands. That is political, even religious to each of them; they carefully collect evidence that confirms their preconceived notions and reject evidence that does not.

For instance, when Wall Street tanks, the poor declare they've taken a horrible loss, and sell off their stocks, consider this an important life-lesson, and swear to never buy stocks again. All of that jibes with their core beliefs about money, so it makes perfect sense to them. The rich take an even worse hit. But their attitude is "Oh look, Wall Street is having a half-off sale!" and they buy all the additional stocks they can. Later, of course, the market recovers. The poor sold low, locking in their losses; they are left behind and their fears are fulfilled. "See, I was right!" Meanwhile the rich see their losses recover, and they bought even more, so they make out like bandits. "See, I was right!"

All those paragraphs to say, your biggest enemy is your existing, entrenched, self-beliefs about money. I don't care who you are. They are wrong. Because they're incomplete. For best success, get rid of 'em.

It's a big world out there

Universities also have lottery winnings. Some very rich alumnus dies, and leaves them $50 million in an endowment. This actually is so common that there is very strict law about what must be done. The law (which literally has "Prudent" in its name) requires aggressive investment of the money to assure growth. That fried every brain cell I had about money, when I became someone responsible for a $8 million endowment. Everything I knew about money is wrong.

An endowment is "forever income". The money (the capital, or corpus) is invested, and only a small amount (3-7% a year) is drawn off. This funds programs, faculty members, etc. All the other investment gains are folded back into the endowment to ensure it grows against inflation. I never realized investments could generate meangful income forever, I always thought investments would eventually be used up.

So, right off the bat. The first $2 million of your lottery winnings, you slap them in an "endowment-like thing" and draw them down at a conservative 4%. This will give you $80,000 a year and still leave room for the "endowment" to grow, so the $80,000 will also grow with inflation. That funds your basic needs. (Also it's taxed as long-term capital gains, at about half normal tax rates).

If you wanted to go kowabunga, make it $5 million and $200,000/year. If you can't make your life work on $200k/year, good grief!

Anyway, with your basic life needs covered, now you can consider the rest of it more investable. Right off the bat you could just throw it in the same account and draw it down at 4-6% a year, assuring a handsome salary for life.

By the way, common mistake here. Don't dissociate yourself from your money and think of it as "not you", "mystery money", "not really yours" or "junk/mad money". And because of that, people don't respect the money, and mistreat (waste) it. Before they realize it, they are mistreating/wasting all money, and that is the road to perdition. It is your money. You paid taxes on it. Make it part of your personal identity.

And if your ethics say "I cannot be wealthy or have airs or superiority over others", boy have I got an option for you, at the end.

Anyway, you could just go off and buy a yacht (hole in the water you pour money into), but always think in terms of endowments. How will I maintain the yacht? If it cost $300,000 a year to keep up, multply that by 25 and put $7.5 million in an internal endowment for the yacht's upkeep. Suddenly you realize that $2 million yacht will tie up $9.5 million of your capital, it's a different decision, eh?

But I don't recommend too many things that are a money sink. I recommend you focus on things which have a fair chance of doing well.

• Social investing. Doing the endowment thing, but investing in companies which correspond to your beliefs. This won't do as well as index funds, and the 'management costs' (picking good stocks) will be much higher.




• Real estate. Normally endowments are skittish of real estate investing because it's "high maintenance" and often doesn't do as well as pure market investments. But if you want to get into it, especially if you have sweat-equity to put into it, and your local market is favorable, then rental properties may be a good investment for you. Always treat it as your business that is expected to make money on its own and measure it against any other investment.




• Small business. However this is a trap for lottery-winner types; they often find themselves making emotional investments in loser businesses that no sane venture capitalist would touch: they aren't heroes, they're suckers. Be a minority investor along with real sharks, and managers who have invested their life savings (have "skin in the game"). And have competent legal counsel involved and listen to them.




• Your own business. But again, swim with the sharks: seek to involve independent VC. If the VC says "ain't touching it with a 10 foot pole" then you have a loser business. If they say "I want more share for my money", you might have a winner, but get good help making it work.

Charity

The trick with charitable contributions is that you really need to plan it even before you sign the lottery ticket. Because that lottery ticket will be taxed at nearly 50% (Federal and state), and you want to shield as much of that income as possible from taxation.

So this is where you need to build a legal team (don't worry, they'll work on a "we'll bill you" basis) and strategize the best way to turn the unsigned lottery ticket into the maximum charitable contribution for the minimum possible taxes, as well as figure out all the tax angles. For instance you might form a nonprofit, then form a partnership which owns the lottery ticket; thus you and your nonprofit split the winnings and the nonprofit's share is never taxed in the first place. This is peculiar to state laws.

Anyway, you then have a nonprofit that controls a considerable nest-egg. You know what to do! Straight into an endowment with it! Then this nonprofit can give donations to other nonprofits pretty much as you direct. This can be done in several forms: A private foundation, or a simpler-for-you donor-advised fund for instance.

Another thing that can happen, but only with careful tax-law management: you can enter the employ of an existing nonprofit, and use your directable charity money to support them. You pay normal taxes on your salary. This method is very widely abused, so there are significant limits on the method; to start with, your salary has to be market competitive.

For most people this deserves the answer of "Index fund".

Take first payment, go to local bank, ask to open index fund mutual account. Put it all in. Don't retire just yet. Don't tell anybody else you have it.

Second payment, put most of it in. Don't upgrade your lifestyle.

Third payment, put most of it in.

The general idea is to put away a good fraction on what is coming. Eventually you'll want to live off the rest of it and not work anymore. The higher standard of living you want, the later this is.

When the lottery annuity runs out, you want to be able to live on the investment income alone. The investment income of two million on the index fund is comfortable.

Talk to a lawyer who specializes in family trusts and establishing family charitable foundations for "high net-worth individuals". Do this before you sign the lottery ticket.

If you were planning to "do good for the world", you will be able to do a lot more good if you can manage to put the lottery ticket in a tax-advantaged form before cashing it in.

People overextend

First problem: you're not as rich as you think you are. Say you just won $768 million from the PowerBall Lottery. You have the following reductions:

1. That's the thirty year annuity amount. The cash amount is more like $400 million.


2. Taxes. Figure on keeping half, or $200 million.

OK, but $200 million still seems like a lot of money. But look at the changes you're making.

1. If you're 30 and quit your jobs (married couple), that's about $60,000 a year for forty years. There's $2.4 million gone.


2. You buy $100 million in houses: a $40 million mansion; a $20 million vacation house; another $20 million vacation house; several more million dollar houses for friends and family.


3. Buy cars for everyone.


4. Buy more expensive food and travel (first class of course).


5. Buy expensive wine/champagne, even though you don't know why it's more expensive.


6. Cosign some loans.


7. Invest in some sure things.

So after you find out that your sure thing investments are worthless, you find that your cosigned loans are due since your friends and family couldn't afford them. Then you realize that your houses cost money after the purchase as well. You have to pay property taxes and utilities as well as pay people to take care of the houses when you aren't there. You have a lifestyle that costs $500,000 a year to maintain but no income. If you live eighty more years, that's $40 million.

Budget

To avoid this, you have to budget. If you have $200 million after taxes, put most of it, say $150 million, into safe investments like index funds and a significant (albeit much smaller amount) into banks. A rough rule of thumb is that five years of expenses should be in banks after retiring. Each year, take a portion of the amount from your investments, say 2%, and put it in your bank accounts. That's the money on which you live.

You have $50 million remaining. This is the money that you can use for capital purchases, like houses. First divide it in two. This is because capital purchases have expenses. Now you have $25 million in savings and $25 million that you can spend. Spend the $25 million. Now, only use the $25 million in savings to pay off maintenance costs on your purchases.

Never borrow

It's easy to borrow when you have lots of money. But while you have wealth, you have no separate income. There's no reason to borrow. Any money you will have, you already have. Borrowing shifts future income's spending power into the present. But you have no future income. You are better off spending the money now and saving the interest. If you've already spent all your money for the year, then you really don't want to spend more. Sell a car or vacation home instead. Borrowing is a sign of overextension when you are retired. Don't do it.

Something that has been alluded to, but not spelled out: nearly everybody out there wants to take your money. That includes:

• Friends and family. They need a new car, they need a new house, they need to have that credit card debt or mortgage paid. They will ask, they will beg, they will court, they will plead.




• Friends and family. You want to show them how rich and generous you are. You offer them cars, houses, jewellery, clothes, bags, restaurants, holidays, parties and what not. It feels good. But it can become a lot of money reaaaaaal quick. And as others have mentioned, the money you actually have is probably a lot less that what you think you have. Poof! It's gone!




• Friends and family. They have this opportunity, they just need a couple of million, it's a sure thing, don't worry, they'll pay back double in no time. Yeah, sure. The only thing that will happen in no time is that they'll be back for more.




• Your sudden new friends. Yeah, you'll make a lot of new friends at those lavish parties. They're not really friends, they just want your money.




• Financial advisors. Luckily, many are real professionals. But quick money in the hands of a fool is like a magnet for the shady ones. They will promise the highest return on earth, no risk whatsoever. And they will be off with your money before you even know it. Stick to really reputable firms, not the guy with the gold Rolex who promises the world to you.

What does this mean?

1. Get a real serious financial advisor. Probably someone from a large reputable firm, with a proven track record. And no, your local accountant who have never seen that much money themselves either is not a good choice, they'll have exactly the same instincts as you and the others, try as hard as they can to avoid it. That's human nature for you.




2. If you can't avoid friends and family like the plague, be sure to run everything you spend through the real serious financial advisor you chose. They will let you know if you can actually afford it or not. Listen to them. Don't override them.

Or you can give me the money, I'll manage it for you, no worries ;->

I seriously doubt that all, or even most lottery winners lose all their money within 1-2 years, but, whatever. You don't need to win the lottery to lose your money on casinos and hookers, poor investment choices, etc. Plenty of people accomplish that just fine without a massive windfall driving it.

Preparation is the key. I often joke about what I would do if I win the lottery, but to a certain extent, it's not really a joke. How often have you seen a lottery winner get interviewed, and when asked what they are going to do with the money, they say, "Oh my gosh, I don't know!" Sadly, they really don't know, which is maddening, because why would you buy a ticket without at least dreaming of winning?

Step #1: Have a plan. As ridiculous as it might be, I have a plan. Someday, when they interview me, I'll tell them exactly what I'm going to do with the money. I have a list of things that has been very consistent for years. When that day comes and I win, it's just a simple process of checking off my list. I might do some stupid things with the winnings, but I'll have done a lot of smart things too. Hopefully the smart will greatly outweigh the dumb.

Step #2: Handle your money wisely today. You don't need to win the lottery to have a financial advisor. If you have any money available for investing, you should have one. I have one I've worked with for 20 years. Should I win the lottery tomorrow, I've already got a trusted advisor in place.

Start preparing now for that big win. Even if it never happens, you will be much better off at least thinking about your money and planning your future. Hopefully you will start putting the pieces in place that will help you plan for that future with or without a massive windfall.

A Fool And His Money Are Soon Parted

The simplest answer is living like you did before you won the lottery. Treat your wind fall as security, rather than indulging. If you can afford how you live and are satisfied, more money has a diminishing return. But hard times always come, and security is the difference between the wise and foolish.

If you look to spend money, you will find ways.

Look for works and studies published about lottery winners.

This will let you know what is coming for you and what happened with those that walked that path before you. Seriously there are hundreds of cautionary tales on what could happen to you. Hindsight is 20/20, use that in your favor.

Get professional help.

Before you even sign the ticket or claim it at the site, hire a lawyer. You can also hire a consultant firm for people that receive sudden cash sums, like with settlements and other lawsuits. Look online.

The best way to avoid problems with the money is to not have that money too available and not have it in your name. You can set a trust fund and receive the money in the trust fund's name instead of your own. This will avoid making your name public and having all sorts of solicitors at your doorstep.

Take the annuity instead of the lump sum always.

You get more money overall and also have a safety net in case you blow it up in the first years.