It’s a problem we’d all like to have: we’ve won a huge lottery jackpot, now what? Is it better to take the lump sum cash payment or the annuity paid out over 25 to 30 years? The answer is a resounding, ‘it depends.’ It depends on your health, on how well you trust yourself not to blow it, on who might come around asking for a little help, on what you plan on doing with the money. There are considerable pluses and minuses to both options and many questions to ask before a decision is made.
Taxes on Lottery Winnings
A quick note: we will not be discussing taxes. Why? Because, taxes are so variable from one location to another that it’s not really possible to cover all the different scenarios. Plus, taxes aren’t fun. Taxes are the story of the hand that’s going to dip into your pocket and take your winnings. One quick point: the two largest lotteries that offer annuity payments are US Powerball and Mega Millions, regardless of which payment option a player chooses, lottery winnings are subject to a US federal tax of 30% in addition to possible state and municipal taxes depending on where the winning ticket was purchased. See, that’s depressing, let’s move on.
How Are Jackpots Calculated
Have you ever noticed that sometimes the US Powerball and Mega Millions jackpots are quoted with another figure called ‘cash value?’ A $40 million minimum US Powerball jackpot has a cash value of, usually, somewhere around $25 million. What’s the difference, what do these numbers mean? A $40 million minimum US Powerball jackpot is the amount that a winner will receive if they take the annuity option and receive 30 payments made over 29 years. $40 million is basically the value of the cash prize plus the interest that will accrue over 30 years.
Can I Beat the Market?
One way to decide whether to take the cash lump sum or annuity payments is to ask whether you can make better investments with the lump sum than the lottery can. Let’s say you’ve won a $40 million US Powerball jackpot with a cash value of $25 million, nice round numbers that are entirely possible. We know that the $40 million figure is actually the value of the cash lump sum, $25 million, after it’s been invested and earns interest for 29 years.
So, can you do better? If you take the $25 million cash payment and invest it yourself for 29 years could you end up with more than $40 million? It’s entirely possible. If you paid yourself $1 million per year, because you need to live off something, you’d need a return of between 5% to 6% per year to end up with more than $40 million after 29 years. While such returns are possible without too much risk, at the end of the day, there is no way to absolutely guarantee a return of 5% to 6% per year, or even positive returns for that matter.
Typically, lotteries that offer an annuity option, like US Powerball and Mega Millions, buy bonds that they use to fund annuity payments to winners. However, it’s important to note that the lottery is on the hook for any losses to the investment, the winner will receive their annuity regardless of what happens to the bonds.
Can I Beat the Reaper?
No, of course you can’t beat the reaper. The real question is how long you’ve got to enjoy your earthly winnings. If you’re young and in good health the annuity option will pretty much set you up financially for life. Using our $40 million jackpot example you would receive, after federal taxes, $451,543 for your first of thirty payments. Your thirtieth payment would be $1,858,612 after federal taxes. That’s a pretty nice revenue stream to have coming in every year without having to spend a moment at work. Contrary to popular belief, if your time comes before the annuity payments have finished, they will still be paid to your estate. However, if you’re concerned that you won’t be able to enjoy your earthly treasure for very long, it may be better to take the lump sum and go a little crazy, because, why not? You just won the lottery, right?
‘Hey, Remember Me?’
It’s no secret that lotto winners are sometimes besieged by friends, relatives, hangers-on, their wives’ cousins’ best friends’ neighbors’ former bridge partner, or whomever, all looking for a handout. It can be staggering the amount of people that come out of the woodwork looking for a little piece of your good fortune. Whether they are looking to you to make an investment to get their business off the ground, or whether it’s a bit of money to treat an ill relative, it can be incredibly difficult to say no. But, if you’ve opted for the annuity then you haven’t got millions of dollars sitting in a bank account and you won’t feel as much pressure to indulge everyone that comes around asking for money. Also, people may feel less entitled or emboldened to ask for something if they know that you’re not sitting on a pile of cash but rather a steady stream of it.
My Own Worst Enemy
Sometimes lottery winners are their own worst enemies. There are countless stories of lottery winners burning through huge amounts of money and being worse off financially and emotionally than before they won the lottery. That winning the lottery has been more curse than blessing for some is not something we want to dwell on, we all know it’s true, but it is something to take into consideration when deciding whether to take the lump sum or annuity payments. Having less money at our immediate disposal can temper our worst inclinations and yet still allow us to live an amazingly comfortable and rich life! We all know that money can’t buy happiness, but not having it can certainly lead to unhappiness, so having a guaranteed, very comfortable income for the next 29 years seems like more than a happy medium.
Of course winning the lottery will remain a dream if you don’t make it happen. There are huge and exciting jackpots the world over simply waiting for someone to come along and claim them, so why can’t it be you? If you’re ready to make your dreams a reality, start by playing the world’ lotteries online today!