Know When to Hold 'Em
He entered a poker tournament on a lark and walked away with millions. You can bet your life he won't be one of those winners who fritter it all away.
(MONEY Magazine) – Binion's Gambling Hall & Hotel is in the old part of Las Vegas, far from the glitz of the Strip. Just a few miles from the legendary Caesars Palace and the swanky Bellagio, it sits on a forlorn stretch of downtown that's about as sexy as a Walgreens--subpar hotels, cheesy casinos and not-so-famous stage shows (two tickets to see Hellbent 4 Humor, anyone? Anyone?). But when Steve Dannenmann strides across the bland wine-colored carpet in the upstairs ballroom after downing a $12.50 T-bone in the coffee shop, he doesn't see the leaky ceiling and the deserted expanse full of stale air. He sees television cameras, bright lights and hordes of poker fans stomping their feet on steel bleachers. He hears them chanting his name. That's what it was like in this room six months ago, when his life changed forever.
It was the World Series of Poker, an annual tournament that attracts amateurs and pros and that's at the heart of America's new fascination with the game, a televised extravaganza that makes rock stars of its winners. Dannenmann, 39, a divorced, regular-Joe C.P.A. from suburban Maryland, entered last year on a lark, splitting the $10,000 entry fee with a buddy and going up against some 5,600 competitors. He had never played tournament poker in a casino and didn't even plan to stay for the whole seven-day tourney--Vegas was an expensive vacation, and he was booked to fly home on the second day of action.
But he wasn't on that flight. He was still playing poker. Matter of fact, he played right to the end. Steve Dannenmann, who usually ends up near the bottom of his Tuesday-night game, finished the 2005 World Series of Poker in second place and won $4.25 million. He became a rock star.
Kind of. He still lives in the same development, drives the same car, and serves the same 1,200 clients in his private accounting practice. While Dannenmann is in a fairly unique situation in terms of how he got his money, problems stemming from the sudden appearance of beaucoup bucks--whether through an inheritance, an insurance settlement or the sale of a business--are common. Some people change their habits drastically and blow their cash. But what has changed for Dannenmann has less to do with new toys than with the pressure that comes with winning a lot of money, especially in a very public way. He wants to spend a little. He wants to invest. He wants to do nice things for people. He wants to have something to show for all this.
ABOUT THAT JACKPOT: There's a twist. Dannenmann split it with the friend who had put up half the entry fee. "A couple of weeks before the Series, my buddy Jerry Ditzel and I had just finished a round of golf," he says. "We were having a couple of beers, and I asked him if he wanted to be my partner in this. He said sure. So we had a gentleman's agreement." After taxes, Dannenmann and Ditzel will each walk away with $1.3 million.
Think it's unfair that Ditzel should get that kind of return on a measly five grand investment? Hardly. Dannenmann's long shot couldn't have been much longer. Even the best pros were estimated to have only a 1,500-to-1 chance of winning the 2005 Series; Dannenmann, a relative neophyte, had lower odds than the gnarliest penny stock on the Street. Some friends thought Ditzel was nuts for putting up the $5,000. A few days before Dannenmann left for Vegas, another pal fronted $120 for some Chesapeake Bay crabs for a get-together Dannenmann was throwing. Dannenmann suggested the guy contribute the $120 to the entry fee in exchange for a percentage of any winnings. The guy said not a chance. He would have made $42,000.
"People marvel at the fact that Jerry got half my money when I did all the work," says Dannenmann. "But I remind them that I had all the fun. He had no fun at all." Dannenmann lets loose a warbling laugh and adds, "He got ripped off."
Before he became Texas Hold 'Em royalty, before the public appearances for Milwaukee's Best and the Maryland Business Development Council, Dannenmann spent 16 years building his accounting business. On weekends he played golf and fished, puttered in his garden and did the occasional bit of oil painting. He bought his 3,500-square-foot home in 2003 for around $550,000, and he drives a Jaguar S series, but it's not as if he's over-the-top rich. His business brings in a comfortable $150,000 to $175,000 a year in accounting and investment-advising profits and, as of late, another $25,000 to $50,000 from mortgage sales. You'd think his winnings would have taken some pressure off his financial situation, and of course they have.
Dannenmann is planning to have his basement fixed up, a project he had intended to do with the help of his 66-year-old father, who supported the family as a milkman and handyman while Steve was growing up. And he wants to buy a new poker table--right now, when the weekly game is played at his house, it's on a pair of banquet tables connected with duct tape. He's putting money into college funds for the kids of three close friends, he hooked up his parents with broadband, and he's paying off his brother's $100,000 mortgage. He also covets a 28-foot fishing cruiser, which will run $120,000 (money he had saved before entering the Series), and a new luxury car to go with his Ford Expedition and the Jag.
But $1.3 million isn't what it used to be, and his vocation has taught him that your money never goes as far as you think it will. Still, Dannenmann is in an enviable position. He expects to pay off his mortgage in 13 years, and he has $297,000 in cash and retirement funds. He estimates that his colonial-style brick house, with its new built-in pool and cabana, is worth around $800,000 (he has $386,000 left on his mortgage). He also has his business.
At the moment, though, he's feeling the tug of another business opportunity: professional poker playing. In November, Dannenmann was invited to play in the Tournament of Champions, an invitational contest sponsored by Sobe energy drinks with a prize pool of $2 million. Competing against some of the greatest players in the world, he finished fifth and won $100,000. That shows that the World Series wasn't a fluke, but still, his winnings don't get him anywhere near "sit on a beach" wealth. The windfall was probably a once-in-a-lifetime score, so Dannenmann now needs to figure out the best way to make it last. He's heard the stories of people winning the lottery and ending up worse off than before they struck it rich. He has no intention of becoming one of those people--he knows that he won enough money to change his life for the better, but not so much that he can afford any missteps.
Sure, Dannenmann is in the personal-finance business, but that doesn't necessarily mean he's his own best adviser. For a second opinion, we turned to Michael Kitces and John Hill of Pinnacle Advisory Group in Columbia, Md.
"The typical issue with people who have sudden wealth is that they don't know how aggressive or conservative they need to be in order to reach their goals," says Kitces. "Some people think $1 million means they can spend an extra $100,000 a year for the rest of their lives, and that's a dangerous road to go down. The good thing is that Steve doesn't seem raring to do that."
Dannenmann wants the option to work half-time beginning at age 50 with the ability to draw $80,000 a year for the rest of his life. These goals are so modest that Kitces and Hill figure he can hit his targets.
• DON'T BE SO NICE--YET Many people who enjoy a windfall feel a charitable urge--Dannenmann's one-off gifts to his brother and friends are a classic windfall move. They're okay, but to avoid disrupting long-term plans, Kitces suggests that Dannenmann put the brakes on generosity for now while he figures out a plan--of which gifts certainly can be a part.
• CHARITY BEGINS WITH A MUTUAL FUND Before becoming a millionaire, Dannenmann contributed about $5,000 a year to charity. He wants to double that. In light of the 2005 windfall, Kitces wants to put him on a five-year plan. "This year you put 50 grand into a charitable donor-advised fund," says Kitces. That way he could get the tax deduction for the full $50,000 now, even though it would sit in a fund until it was used up--earning tax-free interest for the charity all the while.
• TAKE ON DEBT Dannenmann is proud of having no debt other than his mortgage, but Hill believes that for someone in Dannenmann's situation, properly managed debt can be positive. For example, though Dannenmann plans to buy his boat with cash, Hill suggests financing it like a second residence (the vessel has a kitchen and a bathroom, so it qualifies), which will provide some of the same tax advantages: "You borrow $130,000 and pay around 6% interest on the loan, while the money you would have spent on the boat generates 8% as an investment. Plus, the interest you pay is a tax deduction." Dannenmann likes the sound of this ("It's sexy!"), even if Kitces warns that "it comes with a risk that the market fails to cooperate."
• FORGET THE BEACH HOUSE One of Dannenmann's impulses was to use a chunk of his winnings as a down payment on a beach house to rent out during high season. Eventually, the plan was, he would own a house that didn't cost him much. "Buying a house with the intention of other people paying off the mortgage probably won't work," says Hill. "Usually, because of short peak-rental periods, the money that's left after expenses, taxes and insurance covers only about 40% of the mortgage."
• DO SOME TAX PLANNING To benefit from deductions in a year when he would be taxed at an unusually high rate, Dannenmann prepaid all of his 2006 state taxes in 2005. An added benefit to paying those 2006 taxes in advance: He probably won't be able to claim the write-off for 2006, when his income will return to normal and will likely be subject to the alternative minimum tax (AMT), a secondary tax system that disallows many common deductions, including state income tax payments. (Under some circumstances, very high incomes, like Dannenmann's in 2005, are not subject to the AMT.)
• KEEP IT SIMPLE Because Dannenmann can maintain his current lifestyle without touching his poker winnings, Kitces figures that the money left over after he's helped his brother and friends can be put into a balanced portfolio of stocks and bonds with the goal of earning an average of 8% a year. If the market behaves as the Pinnacle advisers anticipate, he'll have around $2.7 million by age 50, even if he never saves another dime. When Dannenmann hints that he might want to spend $30,000 to $50,000 a year in poker tournaments, Hill gives the nod, adding, "Who knows? You might have a better return from the tournaments than you will from the market." Dannenmann expects to use fees from speaking engagements to finance his poker playing.
Even for Dannenmann, himself a financial adviser, the decisions he now needs to make and the options that are open to him seem a little overwhelming. That's why he values receiving some financial advice rather than being his own planner. "Having lots of opinions and other people feeding you ideas is always a good thing," he says. "Poker is a one-person game, but investing shouldn't be."
The Bottom Line
Dannenmann is in good shape because he hasn't spent much. But he needs to avoid acting on impulses and put a plan in place.