Question of the Day - 23 November 2022

Will you be alive in 30 years.

A yes or no answer still leaves only one thing to do.

Be smart about the money.

The lump sum, on even a million dollar win doesn't leave you much in your pocket, but if invested wisely will pay you dividends for the rest of your life.
Dividends you will be grateful for when life throws those inevitable curve balls.
If you save those dividends then you could do the same tax evading system the wealthy use, use your investments as collateral for a loan.

Or you could be as stupid as all those other big megabucks lottery winners and be broke within a year owing the IRS all the taxes on that money you didn't pay first.

I wouldn’t trust any part of the government with securing one dollar let alone a billion.  Take the lump sum and put it in the most secure investments.

Amen Donzack.

...what the present value of the annuity you would receive is, which is a function of current interest rates. If the lump sum payment is more than that, take it; if less, take the annuity. So perhaps an explanation of how to calculate present value would be in order.

I will/would be 95 in 30 years, not many in both sides of my family lasted that long. BUT, I would take the annuity mainly to have an estate that gave to a charity the proceeds the remainder of what was coming to me. 

Taxes should not be taken out of any gambling winnings. You see these enormous $ amounts advertised and then once you opt for the lump sum and then account for taxes you are lucky to have 40% of what is actually advertised.

First is interest rates.  When interest rates are low the lump sum will be relatively large, while when interest rates are high the lump sum will be relatively lower.  The lower the interest rate environment, the more attractive the lump sum.  While rates are up from recent years, they are still relatively low historically, so the lump sum may be more attractive right now.

Second is your age.  The younger you are, the more attractive the annuity will be, while the older you are, the more attractive the lump sum.  Another factor is whether unused annuity payments can be passed on to heirs.  Since this is a non-life-contingent payment, one would think that unpaid annuity payments can be passed on to heirs.  If so, age is less of a determining factor.  If not, the lump sum can be more attractive.

I've read that half of the original lottery winners went bankrupt because they didn't know how to deal with winning the lottery.  The first rule--don't tell anyone!  The second rule--get a trusted group of advisors--tax, legal, investment, etc...  Then make a decision.  If the jackpot is big, like the recent win in CA, maybe you would take the annuity since there will be plenty of money each year--but with other jackpots probably the lump sum is better since you should be able to invest the money yourself and earn a greater return than the state will be paying you.  Personally, I am waiting for an opportunity to try these rules.

Actually that isn't a consideration.  If you take the annuity option, the lottery company will purchase an annuity contract from a highly rated life insurance company.  In fact, the lump sum payable is just the premium that the insurer will charge for the annuity.  The insurer will in turn invest the amount into high quality laddered bonds paying coupon rates somewhat higher than the discount rate used to calculate the lump sum amount.  Therefore none of the money will be in the government's hands.  Instead it will be held, first, by the lottery company, which is a private company, and then by one or likely several life insurance companies, which are also private companies. None of the prize money is ever held by the states.

Of course, on the other hand, even if it were held by the states, I don't believe any US state has ever defaulted on a debt obligation.  There is a reason that government debt, whether federal or state, is considered to be the safest investment option.

Maybe living in Chicago,Cook county,Illinois makes me a little skeptical of all things government. At least if my lump sum failed it was my fault. Can a winner split between lump sum and annuity? 

As all of these comments say, there are many implications to consider.  For me they are:
1 - Can this be passed down to heirs?
2 - Amount of winnings - Annual payments if taken as an annuity.
Considerations:
 - As stated the average person doesn't know how to handle such a change of life, and SO MANY go broke.  Not ME you say. That's what they said.
- Did you know, the payment schedule go up 5% per year until the total winnings are achieved.  That means the annual payment is less than $$/30 years.  

I would go with the annuity as it would give me more of the money over the long haul.  Being in my mid 50's I might see the payments all the way to the end of the 30 years, but if not, it can be passed on to my heirs.  

All I can say is it would be great to be the one that has to make the decision. for consideration 1) not to blow it like many winners have done,  2) to make the wisest tax decisions. 3) provide for my family's future.  To comment on some of the comments, Kevin, I think that the cash payout is based on prevailing rates and therefore should be a wash unless you want to gamble on the direction of future rates, and Donzack, take the lump sum and then buy an annuity with whatever amount of the total you choose. 

The biggest issue with taking the annuity is with inheritance taxes. Let’s say you take the annuity, then are killed by a falling meteorite a year from now. Your heirs now owe taxes on the remaining 29 years of payment, and the government wants all that money now- they won’t wait for the annual payments. So your heirs then need to sell the remaining annuity payments to a financial institution that will give them just a percentage of the total so the taxes can be paid. Your heirs end up with almost nothing. Better to take the lump sum and set up conservative investments where you only spend the interest. And to have a robust estate plan. 

Of course you can do a split of lump sum/annuity.  Take the lump sum and buy whatever annuity you want on the open market…. They aren’t magic, just a product.

For me and several other senior citizens, there is no question as to what to do. I am 71, and I'm lucky to have reached this age, given my obesity and other health conditions/problems. I don't even expect to reach 80. Plus, I don't have any heirs: no spouse, and no children. So taking the lump sum is automatically the obvious choice. But for all you folks who are not in this position, there's another reason to take the lump sum: It's because all those phenomena embodied by Murphy's law and Sh*t Happens, etc. If you count on things being the same or fine continuously in the future, something screwy might happen, and you could get screwed. That kind of thing happened when the Plaza got new owners and they erased my $200+ in points & food. Yeah, I know, this isn't the same, but it doesn't have to be. Things happen that we can't imagine. It would always be something to worry about. So take the lump sum and make all of that impossible. Then just invest and live wisely.

A couple of people have touched on this, but definitely when you consider tax and inheritance issues, it's better to take the lump sum and invest it. You will likely exceed the annuity payment amount every year if you have a good investment advisor. The hard part is wrapping your head around the fact that you still need to work within your budget. As most people will tell you, it doesn't matter how much money you have, the spending will always try to outpace the income if you let it!

I am 79 years old so annuity would not be realistic. We know the "rules" for winners of a big amount : Attorney, Financial Advisor, Setting up trust, etc. All we need to do is actually win something. Have a Happy Thanksgiving!

It's an easy choice for me.  I'm in my mid-60s and have no wife and no known children or grandchildren.  My one sibling has no descendants.  None of my first cousins have any, either.  I'm not close to any other relations.  So, whatever I have left when I go will mostly go to charities of my choosing (small ones that will appreciate it) and some to friends.  I take the lump sum.

I know the lump sum is just over half of the jackpot, BUT since I live in a state with a fairly low state income tax and plan to retire to one of several with equally low or no state income tax, I'll have around 55-60% of the lump sum after federal and state taxes.  I can invest that to live well on the after-tax income and leave the principal intact or substantially so and make those charities quite happy when I go.

The key is to have a good team of advisors--tax lawyer, general lawyer, tax accountant, fee-only financial advisor, etc.  Don't give anyone authority over any big piece of your money. 

In the past, I pretty much would have set my mind to taking the lump sum. Now, and with an amount like a $2B+ jackpot and knowing the funds will keep rolling into my estate for the full 30 years; whether her or not, I'd take the annual payout.

It doesn't matter to me. I could work with either amount.

You are far better off to take the annual amount, and if push comes to shove you can borrow against future payments. From a tax perspective the interest you pay on the loan is deductible against the taxes you will pay on the amount. This still lets you be an idiot with your money and blow it all in 1yr if you want. However this strategy also insulates you from having a large tax bill you can't pay - as the lender will only lend you money that you will receive - which accounts for the tax burden. You are best to have the moneys paid to a trust, then you withdraw from the trust - assuming there is money left to be had the trust can be inherited as it doesn't expire when you do. 

I'd take the lump sum $630 million in a heart beat.  I'd then place it a liquid treasury fund and earn the 3% to 4% and sit on it for year.  At the end of one year I'd have somewhere around $20 million to keep me going until I really figure out what to do with my $630 million.