When you see lottery winners on TV who have earned a huge payout, the question inevitably asked is whether they took the money all at once in a lump sum or annually with a payout option. If you are faced with such a question and if that is the case, congratulations, which payout version will be right for you? The answer is not as easy as it might seem. There are advantages to having either a lump sum or annual payout which will depend on your circumstances.
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Why the Lump Sum is Generally the Best Option
In terms of mathematics, the lump sum is under most circumstances the best option. That is because the taxes are taken out at one time. Unlike an annual payout where the taxes are taken out each time you receive the money. The lump sum means that you are paying less in taxes overall.
Of course, this assumes that you do not blow the entire amount before the year is out. But assuming you can control yourself, the money to be made that can be built off what you receive will be considerably greater over time.
In other words, let’s say that you win $500 million after taxes and decide to invest $475 million right away. Even at 5% interest on safe investments, you would earn over $2 billion over 30 years. You essentially go from a multi-millionaire to a multi-billionaire all with taking a conservative risk.
Compare that with taking an annual payout. Even if you invest most of it after taxes as well. Over the course of 30 years with a 5% return the total amount would be far less than $2 billion. This is especially true with most lotteries that pay smaller amounts at first, followed by larger amounts in the years that follow. This means your money has less time to build up earnings.
Why Annual Payments are the Best Option
While it does seem that the lump sum is the superior option, but there is one reason why you might want to take the money annually. You can’t blow it all at once.
That may not seem to make sense to everyone, but if you are the type of person who spends money willy-nilly once it gets into your hands, even hundreds of millions of dollars can disappear quickly. This has happened to lottery winners in the past who would’ve been far better off with an annual payment that kept coming in year after year.
Of course, it would be nice to have the additional money that a lump sum provides. But if you feel that you cannot keep from spending it all. Or if you believe that others may take advantage, then go with the annual payments and do not sign anything that takes them away from you.
You have a choice when winning the Powerball lottery of choosing an annual payment or a lump sum. The choice you make should reflect what is in your best interest.