The benefits of lump sum and annuity payments
There are two ways in which lottery winnings can be received, as a lump sum, a yearly annuity, or the ability to choose one of the above. How do you determine which method would be more beneficial to you? There are many thoughts on this topic and most of them are based around the fact of taxes. Which method would mean you would play fewer taxes? Will tax rates remain the same or increase in a few years? What tax shelters can you access to reduce the total amount of taxes you have to pay for your winnings?
Lump Sum or Annuity?
Although the topic of taxes is an important one, there are other more important factors to consider. Taking a lump sum means you have all the money you have won (minus taxes) available to do whatever you want with. Invest it, spend it, give it away, buy more lottery tickets, whatever you choose. The full amount is there for you to play with. Taking the annuity means you have limited funds each year to enjoy and basically have to live on a budget. Lump sum equals total freedom, annuity equals less freedom but longer term. That’s how most people look at it.
However, you should decide on which type of win to take based on your own personal situation. For instance, if you are a spender, then you may want to go for the annuity over the lump sum. If you are a saver, the lump sum may be the better choice. Worried about long lost relatives bothering you for money? If you take the lump sum, it’s easy for them to say that you have all the money you could ever need and won’t miss the measly little amount you could give to them. With an annuity, you can always say that this is the amount you have for the year and after paying things off, getting things you need, and doing your budget, there is not much left over and can’t afford to give or loan any out.
One of the biggest factors that most people also consider is the age of the winner. If you are young, go for the annuity. If you are old, go for the lump sum. The logic in this is the assumed fact that if you are younger you are most probably going to live a long time and therefore with the annuity, you would live to be able to collect all the money due to you. If you are older, you are closer to death and with an annuity may not make it through all the payments, so take the lump sum and have a blast before you die.
From a purely statistical viewpoint this makes a lot of sense. From a practical viewpoint, it doesn’t. Just because you are 30 doesn’t mean you won’t get killed by a car or lightning or falling space junk in a month. If you are 70, you don’t know that you are going to live to 98 and a half and die in your sleep. Life happens and you can’t predict the future. Statistics aside, what is the best plan for you?
Fist of all, look at your spending patterns. If you truly are a saver and are great with your budget and money, then the lump sum would be a great option for you. If you were a spender by nature, then limiting the amount of money you have each year would force you to have to budget and live within your means. In this case, the annuity is your better option.
What if you are married and have a family? The lump sum may be the initial way to go, but you cant predict how your family may save or spend the money once you are gone. Since most lottery annuities can be transferred over to a spouse upon your death to receive the remaining payments, it guarantees a yearly income for them rather than a pot that can dipped into without thinking.
You will need to sit down with your spouse or family and discuss all the implication that a lump sum or annuity are both beneficial and detrimental to you. Taxes, ages, current financial situation, spending and saving habits, health conditions, an other factors have to be taken into consideration and weighed both positively and negatively to see which option will benefit you the most. Once you take into consideration all these factors you will come to best decision for you, either the lump sum, or the annuity payments.