Taking the Lump Sum Lottery Payout or Monthly Payments

Lottery PayoutIf you won the Powerball, what would you do with the lottery payout?  Two lucky ticket holders in the largest Powerball jackpot in history and their associates will have to decide. Officials say all six numbers to win the record $587.5 million went to ticket holders in Arizona and Missouri, and they’ll have to decide on taking the lump sum lottery prize in cash or monthly payments.

With such a large lottery payout you might do better taking the lump sum upfront because no matter how you take the money, you will be taxed at the highest tax rate.

On the other hand, if you won a smaller lottery prize like 58 winners did who hit five numbers in the recent drawing for a million dollars each, you might want to spread it out over a number of years to keep out of that tax bracket.

Not many people will win the lottery payout, but if you do, then you have to consider how you would take the payment. If you were to retire from your job, the decision would probably be the same for your pension plan – do you take the pension payments as an annuity for the remainder of your life or in a lump sum?

In either case, the decision will probably be the same. It depends on a number of factors, which include:

  • The life expectancy of the winner
  • The payout size
  • The winner’s financial circumstances
  • The lottery or pension tax bracket
  • The person’s tolerance to risk
  • The investment intelligence

One Massachusetts woman won the lottery and took the lump sum. The lottery prize was $294 million and before taxes were applied, she received about $168 million. If she had chosen to take the yearly payments, she would have received about $11.3 million for a period of 26 years – calculated 26 x $11.3 million totals a little over $293.8 million, which is close to the actual lottery prize amount.

Paying Taxes

Taking the lump sum will subject you to taxes in one year and it will put you in a higher federal tax bracket. The Massachusetts winner paid the government approximately $65 million in taxes, leaving her with a total of $103 million.

 Managing your money

When someone wins the lottery, there are a lot of variables. Some people who don’t have money management skills could squander a big lump sum payment.  By opting to receive payments annually, poor money management will be confined to just the annual payout, possibly learning from the mistake before the second year’s payout arrives.

Investing your money

If you have no investment skills, then you could hire a financial professional to make investments for you and manage your investment portfolio. If you take the lump sum and don’t invest some of it, you run the risk of losing everything.

Inflation

One of the main risks of yearly payments is that they are fixed. As a consequence, inflation will reduce the value and your buying power. Financial advisors suggest that you should partially invest in stocks, real estate or a commercial annuity whether you take the lump sum or the annual payments.