Avoiding the Lottery Curse: How Settlement Winners Can Build Wealth Instead of Losing It
Winning a large personal injury settlement should bring peace of mind.
But history—and human nature—show us that sudden windfalls often disappear faster than anyone expects. Lottery winners, pro athletes, and inheritance recipients frequently end up broke within a few years. The same risk applies to settlement recipients who don’t protect their money with care.
This problem has a name: the lottery curse.
The good news? With the right steps, you can avoid it. In fact, your settlement can become the foundation of lasting wealth and security.
What Is the Lottery Curse?
The lottery curse describes what happens when someone suddenly receives a large amount of money without the tools or systems to manage it. Instead of securing long-term stability, they overspend, mismanage, or fall victim to scams.
Research has shown that many lottery winners file for bankruptcy within just a few years of their big win. Professional athletes, despite earning millions, often face financial collapse after retirement.
Settlement recipients are not immune.
The psychology is the same: when money feels like a windfall instead of compensation for long-term needs, it becomes easy to overspend or miscalculate.
Why Settlement Recipients Are at Risk
A large settlement may look like “extra money,” but it is not. It is a replacement for lost wages, future earning capacity, and long-term medical costs.
In Colorado, settlement payouts often arrive as a lump sum or through structured payments. Either way, they are designed to support years of needs—not short-term desires.
Risks for settlement recipients include:
- Overspending too quickly on lifestyle upgrades.
- Underestimating taxes on certain portions of the award.
- Forgetting liens and subrogation claims that reduce the net amount.
- Losing government benefits if settlements are not structured properly.
- Falling for scams or predatory investments.
The combination of sudden money and financial inexperience is exactly why many people fall into the lottery curse.
Step 1: Acknowledge the Psychology of Sudden Wealth
The first way to avoid the lottery curse is to understand the emotions that come with sudden money.
Settlement recipients often feel:
- Relief that the case is over.
- Gratitude for the financial help.
- Excitement at the possibilities.
- Pressure from friends, family, or even strangers to share or spend.
Those emotions are natural, but if they guide your financial decisions, they can lead to disaster. Recognizing that your settlement must serve long-term needs helps you build discipline.
Step 2: Know Your True Net Settlement
Colorado law requires settlements to satisfy liens and subrogation claims before you know what’s really yours. That means your final net may be far less than the number you see on a verdict sheet.
Key deductions include:
- Attorney’s fees and costs.
- Medical liens from hospitals and doctors.
- Insurance reimbursement (subrogation).
- Medicare or Medicaid set-asides.
Until you know your true net settlement, you cannot plan accurately.
Step 3: Separate Needs from Wants
The fastest way to lose a settlement is by treating it like free money.
Start by dividing your financial picture into two categories:
- Needs – medical care, rehabilitation, housing, income replacement, insurance, education for children, retirement stability.
- Wants – vacations, luxury cars, oversized homes, expensive hobbies.
This doesn’t mean you can never enjoy your money. But spending on wants before securing needs guarantees the lottery curse.
Step 4: Use Structured Settlements Where Possible
Colorado courts often approve structured settlements to reduce the risk of overspending. Instead of one lump sum, structured payments arrive over time.
Benefits include:
- Regular income flow for predictable expenses.
- Reduced temptation to overspend.
- Protection from creditors in certain cases.
- Flexibility to cover milestones like college tuition or medical treatments.
Structured payouts may feel restrictive, but they are one of the strongest safeguards against the lottery curse.
Step 5: Build a Settlement Protection Team
Managing a large settlement is complex. You need more than a single advisor—you need a team of professionals who can coordinate legal, medical, and financial planning.
This team should include:
- An experienced injury attorney to negotiate liens and protect your legal interests.
- A financial advisor with settlement planning expertise.
- A tax professional to handle IRS and Colorado-specific tax rules.
- A trustee or settlement planner if special needs trusts or structured payouts are required.
Having multiple perspectives reduces the chance of mistakes and keeps predatory schemes at bay.
Step 6: Plan for Taxes and Inflation
Many settlement recipients mistakenly assume all settlements are tax-free. In Colorado, compensation for physical injuries is generally not taxed, but there are exceptions:
- Punitive damages.
- Interest earned on settlement funds.
- Compensation for lost wages.
Inflation is another hidden danger. The cost of medical care in Colorado continues to rise faster than general inflation, especially for long-term rehabilitation.
If your settlement doesn’t account for both taxes and inflation, you may face financial shortfalls.
Step 7: Guard Against Predatory Investments
The lottery curse often strikes when recipients fall for bad investments. Unfortunately, the moment news of a settlement spreads, opportunists appear.
Common red flags include:
- “Guaranteed” high returns.
- Friends or relatives pitching business ventures.
- Pressure to invest quickly.
- Complex strategies you don’t understand.
The smart rule: If you don’t understand it, don’t invest in it. Stick with licensed professionals and conservative strategies.
Step 8: Preserve Benefits With Special Trusts
Colorado clients receiving government benefits (Medicaid, Medicare, SSI) face additional risks. If settlements are not structured with special needs trusts or set-asides, you may lose eligibility.
These legal structures allow you to keep your settlement while preserving vital healthcare coverage. Skipping this step can create catastrophic consequences.
Step 9: Review Insurance Coverage
Winning a settlement doesn’t mean future protection. Many Colorado drivers learn this the hard way when they’re later hit by uninsured or underinsured motorists.
If your financial profile has changed after a large payout, you must review your:
- Auto policy for UM/UIM coverage.
- Health insurance coverage for long-term care.
- Umbrella liability policies to shield assets.
Insurance is not an expense after a settlement—it is a safeguard for what you’ve just fought to secure.
Step 10: Think in Decades, Not Months
The ultimate cure for the lottery curse is long-term thinking.
Instead of asking, “What can I buy now?” ask:
- How will this decision affect my finances 10 years from now?
- Will this purchase increase or decrease my family’s security?
- Am I protecting myself against future accidents, health issues, or income loss?
Your settlement should carry you through recovery and protect your loved ones well into the future.
Colorado Case Study (Anonymized)
One Colorado family received a $1.2 million settlement after a catastrophic truck accident. They immediately bought a larger home, luxury cars, and took extended vacations. Within three years, medical costs and everyday living drained their funds. They ended up selling assets to cover care.
Another client received a $900,000 settlement and chose a structured payout, combined with conservative investments. Twenty years later, she still has steady monthly income and preserved her Medicaid eligibility.
Both cases involved similar amounts. The outcomes were entirely different—one followed the path of the lottery curse, the other avoided it.
Conclusion: Turning a Windfall Into a Legacy
The lottery curse is real. But it doesn’t have to define your story.
By understanding your true net settlement, protecting against overspending, building a strong advisory team, and thinking long-term, you can transform your payout into lasting independence. Instead of a brief burst of wealth, your settlement can become the financial foundation your family depends on for decades.
Contact Flanagan Law Today 720-928-9178
Want to know how to protect your financial future after you win a large settlement payout?
- What to Do After Winning a Large Settlement: Smart Money Steps to Protect Your Future
- Avoiding the Lottery Curse: How Settlement Winners Can Build Wealth Instead of Losing It
- Five Costly Mistakes People Make With Large Settlements—and How to Avoid Them
- Turning a Settlement Into Security: How to Protect Your Family and Future
- From Settlement to Stability: Why Financial Planning Matters After an Injury Case
