Should You Take Your Lottery Winnings in a Lump Sum or Annual Payments?
Playing the lottery, at least on a national scale, is often called "a tax on people who are bad at math." The odds of winning the top prize in the Powerball lottery are a constant 1 in 175 million. The number of people who buy lottery tickets does not affect the odds of winning, but it does affect the odds that more than one winner will have to split the jackpot.
That said, there can be benefits from buying a ticket even when you don't win, up to a point. If you buy a raffle ticket that will benefit a charity, you've made a donation. If you get as much pleasure out of hoping to win on your $2 ticket as you would have gotten out of the $2 candy bar you otherwise would have bought, then it's worth the $2. But if you buy more tickets, the net worth goes down as it cuts into the family's grocery budget. And if you will be sorely disappointed when you don't win, the value of the initial pleasure is wiped out.
But what happens when you win the jackpot? Business Insider take a look at the option you have of taking the winnings in a lump sum vs. an annual payout plan. They crunch the numbers as far as taxes and investments go. Taxes are going to take a lot of the money either way, but when the jackpot is $400 million, does that really matter? The real difference is in whether you invest your winnings. A decent investment plan will make a lump sum pay off big over time.
What the article does not cover are real-life headaches for a lottery winner. Here are your estimated payouts, which will vary depending on your state taxes:
You can take the cash up front. This is a $223.6 million check. After paying federal taxes on it, we calculated that you'd have $135.1 million left. Not bad.
You could also take the annuity, which pays $400 million over 30 years with an increasing annuity — $7.1 M the first year, $7.4M the next, increasing up to $22.2M in the 30th year — and pay the top rate every year for the next thirty. That makes the $400 million jackpot worth, assuming the tax rates don't change from here to 2043, $242.9 million after federal taxes.
Now factor in all your relatives, who know you've won a $400 million lottery. If you don't make each and every one of them a millionaire, they will be very disappointed. And you can't do that on $7 million. You have more relatives than you realize. You can set up large trusts for your children, but what about your grandchildren, nephews, siblings, and cousins? None of them will understand why you have to draw a line somewhere. You can hand out $10,000 at a time, but there will be at least one of your grandchildren and quite a few cousins who will spend it within weeks and come back for more. For years. Until they hate you, and vice versa. Of course, not all of your relatives are like that, but you don't know until you are confronted with vast wealth.
Here's another scenario: Say you have four children, and you want to treat them all equally. You set them each up with, say, a $10 million trust that pays out when they are adults. Maybe even as an annuity. Then those children grow up. Child one uses the money to buy a house (or two or three), set money aside for retirement, put their kids through college, invest for their heirs, and doesn't brag about how much money they have. Child two gives the entire amount to their church, and lives a marginal existence while working a low-wage job. Child three never works, becomes a drug addict, and refuses to have anything to do with the rest of the family. Child four enjoys the money, becomes a real ass, abuses his household servants, and invests in third-world sweatshops. Are you now regretting your promise to treat them all the same and give them money you no longer control?
Those of a certain age will also need to factor in how long you expect to live to enjoy that money.
Oh sure, it's fun to dream. The question "What would you buy if you won $400 million?" is kind of silly, because you could buy whatever strikes your fancy. A more thoughtful question is "What would you do if you won $100,000?" That takes some real decision-making skills, because it's a large but limited amount that will not allow you to quit your job forever. The idea forces you to choose the most important things to do with your money. I once had some great ideas for this $100K, but now it would be a simple case of paying off my debts and using what little is left over to help pay my kids' college tuition. My life would not change much at all, except I'd have less stress.
What would you do with $100,000? What would you do with $400 million: would you take the lump sum or the annuity? How would you handle distributing that money? The question is moot for today; the $400 million winner has emerged, and the Powerball jackpot sits at $60 million. Which isn't bad, either.
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Hiten A. Raja
Nairobi.
KENYA.
Hiten@HitenRaja.com
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