What Is Better Annuity Or Lump Sum

What Is Better Annuity Or Lump Sum – Decisions, decisions. When I win the lotto, should I take everything in cold hard cash or take my mega millions in yearly increments?  It’s a dilemma made in heaven: when you win the lottery, what is better, annuity or lump sump winning?

We have heard the stories and dreamed of the big dreams of hitting that mega million Powerball jackpot. There was the $400 South Carolina jackpot, the sole winner of New Jersey’s $533 million jackpot, and the mother lode of all jackpot’s, California’s $1.5 billion

Making The Better Choice
What Is Better Annuity Or Lump Sum? – Making The Better Choice

Not all state lotteries are made equal. Most state lotteries such as Powerball give you the option of taking your winnings in one lump sum or a 29-year annuity of yearly payments. How do these payment schemes work?

Show Me The Money
What Is Better Annuity Or Lump Sum? – Show Me The Money

Lump sum payments are single cash transfers and are usually the preferred choice of most mega-jackpot winners. We want the money, the whole cash immediately, and who wouldn’t? That’s the most significant advantage of taking your winnings in a lump sum – you have complete control and full access to your money.

Annuity Can Be The Answer
What Is Better Annuity Or Lump Sum? – Annuity Can Be The Answer

Or you can choose to receive your money in an annuity, annual payments usually over a 30-year period. Well, 29 years to be exact because you would receive your first annuity immediately.

The schedule of payments and structure of your annuity would depend mainly on the lottery and state.

A good example would be Powerball. The lottery gives you both options, but if you opt for the annuity, Powerball keeps the cash amount and then invests it. You get paid for each annual installment plus the earned interest of the remaining balance.

Mega Millions lottery, however, sets a 5% annual increase each year. So over a 30-year payout, the increase would grow substantially.

So What Is Better, Annuity Or Lump Sum?
So What Is Better, Annuity Or Lump Sum?

Here the money experts are divided. Over at the New York Times, money analyst Josh Barro [4] recommends quite strongly that mega lotto winners take the annuity. This is very true for those who are financially confident about handling that much money or for those who feel they lack the financial discipline to spend wisely.

We have read so many stories of lottery winners frittering their money in useless things and shady investments and end up declaring bankruptcies. These winners ended much worse than when before they won the jackpot.

Then there is Business Insider who worked the numbers, and even if they recommended taking the annuity, winners should still take the lump sum if you factor in all the investments made wisely.

Using an imaginary $400 million jackpot win, and crunching the numbers for your dream nest egg over a 30-year period, a lump sum taker would still end with more money even with a rate of return of 4%. If your rate of return increases, the more money you would end up with at the end of the 30-year-old period. A billion more if your rate of return is at 10%.

What Is Better Annuity Or Lump Sum? – Taxes Are Due

Before you buy that paradise island in the Caribbean when you win the lottery, take heed. You won’t be taking home that lump sum as advertised. Uncle Sam is waiting on the wings to take his dues in taxes. Lotteries are subject to federal taxes. Other applicable taxes would depend on where you live and what state lottery you won.

Using the Business Insider model, federal taxes would take their 40% cute (it’s actually at 39.6%, but we are rounding-off the percentages) even before you get a whiff of that money in the form of a withholding tax.

Then there’s income tax, and if you live in New York, then you know that the state would take a big chunk. Lucky you if you live in no-income-tax Florida.

Factor in the size of the winnings. The more significant the amount, the more you would get pushed into the highest income brackets.

The Real Money
What Is Better Annuity Or Lump Sum? – The Real Money

So with a $400 million lottery win, you would only be able to take home $135.1 million after taxes. Yeah, don’t overthink the numbers. It’s still a win. If you choose the annuity, you would receive $7.1 M in increasing increments over the next 30 years. Minus tax, overall, you would be getting $242.9 million in total.

However, that lump sum amount doesn’t factor in the wise investments you hope you will be making in the next 30 years. If you are not a spendthrift, you don’t have greedy relatives, and you trust your financial savvy, you could still end up with $382 million plus change with just a 4% rate of return.

However, if you won $10 million, the annuity would give you a better rate of return because you will be paying significantly lower federal taxes. Remember, you would only get pushed into the highest tax bracket once you reach the ceiling of the income bracket.

Crunching the numbers again, you might still be better off with an annuity with smaller winnings.

What Is Better Annuity Or Lump Sum? – The Last Word

Taking the annuity isn’t as sexy as taking the lump sum. But the great thing about the annuity is you get a do-over every year in case you lost your head one day and bought a sports car collection because hey, a Ferrari is a Ferrari. The following year you don’t need to end up sitting in a garage full of cars but unable to meet your basic needs.

There is, however, another option. You take your lump sum because nothing beats the power to control and have full access to your money. And then set aside a part of that lump sum to invest on a private fixed annuity. This solves the dilemma of having financial control and at the same time having long-term security.

No matter the check, money experts have several common advice for you, the lottery winner. Don’t quit your day job, don’t tell anyone, and get a trustworthy tax advisor. Money is money. Regardless of the windfall or the awesome luck that you have, it’s still worth spending your money wisely.

Won Big Money? What's Better? Annuity Or Lump Sum - See Here
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Won Big Money? What's Better? Annuity Or Lump Sum - See Here
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