Lottery Lump Sum or Payments?

The Mega Millions Jackpot hit nearly half a billion dollars a few months ago and I was thinking about what I would do if I won the whole thing – and I’m talking about before we get to the hookers and blow. More specifically, I was wondering if it would make more sense to take the lump sum or annual payments.

If you won the lottery for about $500,000,000, the lump sum payment would be good for about $360 million and the annual payments would be good for about $19,250,000 a year for the next 26 years, give or take a few hundred thousand dollars (source)(warning: auto-play video).

Before we even get into the tax implications, you can see the challenge already. If you take the lump sum payment, you are chopping off $140,000,000 right off the bat. That’s not exactly chump change. Of course the benefit is that you get to play with that money before you die, the economy collapses or you get called off to war.

The annual payments pay out smaller amounts over time. You don’t get to play with all your money at once, but you have a steady flow of income to cover you. As long as you don’t do anything too incredibly stupid, you’ll always have that money coming in. If you have a problem keeping spending in check, this might be the best way to go. Plus, you’ll end up with an extra $140 million.

There’s something else to consider, though. Long term lottery payment plans are set up as annuities, which are basically big piles of cash that are set aside. Interest is collected on that pile of cash and regular payments are made out to you.

Here’s the thing state lotteries don’t tell you: the face value of that annuity at the time you win the lottery is equal to about half of the stated prize amount. When the lottery people say that jackpot is worth $500 million, what they really mean is that they have about $250 million set aside collecting interest. At current interest rates, those payments over 26 years should equal $500 million.

You’ll also have to take into consideration your personal circumstances, such as age and health. If you’re 92 years old, you probably don’t want to take the annuity option. But then again, you can specify a beneficiary to receive your payments after you die. Then again, you might not want to.

That brings me to my second point: hire a lawyer and a financial advisor. Make sure you get the best help money can buy in your town. Don’t go down to the local Primerica office and let Joe Blow manage your millions. Talk to a qualified financial expert (someone with experience) and get help from someone who does this for a living.

You’ll want to consider your financial goals, personal circumstances and family situation before you make any sudden moves. So if you win the big lottery, don’t rush through things. Claim the prize of course, but don’t make any payment decisions until you talk to an expert.

You can read a more in-depth lump sum vs. payment article here.

You might also be interested in this article: winning the lottery with +EV tickets

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