Nothing can quite prepare you for the rush of emotions and adrenaline when you hit the jackpot. After all, winning a big lottery is probably one of the most exciting things that could happen in your life.
Just imagine waking up one morning, and going about your routine just like every other day, before watching the Powerball draw and going to bed a millionaire. Or billionaire.
With that excitement may come a little anxiety. That's because along with winning big also comes major legal, financial, and tax decisions. And those decisions will need to be made quite soon.
But, let's face it, they're pretty luxurious decisions, aren't they? If you win Powerball, one of the biggest choices you will need to make is whether to take the lump-sum payment or the annuity.
Let's take a look at why an annuity payment could be the better option for you.
Payout Options When You Win the Jackpot
Before you can collect your winnings, you need to decide whether to collect the entire amount in one go or take it out over a longer period of time.
If you decide to take out everything in one swoop, that's called a "lump-sum payment". If you decide to choose the lump sum, you will receive all your winnings after taxes in one large amount.
The other option is to agree to a long-term payment plan, which in the lottery world is known as the "annuity payment".
An annuity will allow you to receive a stream of disbursements once a year, from an account that is created by the lottery operator.
Which is Better: Annuity or Lump Sum?
When a winner takes the lump-sum payment, it's usually a smaller amount than the jackpot they actually think they've won. That's because the full amount is taxed, and there's a discount involved with taking out the entire winnings up front. It's also because the jackpot that is advertised is based on the amount a winner would receive if they chose the annuity payment. With all that said, with the lump sum you get the money all at once and are free to use it however you see fit.
On the other end of the spectrum are annuity payments. Overall, these payments add up to a larger sum compared to the lump-sum payout. There are those lotteries that set up payments that add up to the jackpot amount, be it through payments that rise steadily in line with inflation or through equal payments over a number of years.
You will pay taxes with annuity payments as you receive your payouts; since you'll receive a smaller amount over a longer period, some of the payments are likely to be taxed at lower rates than if you were to go the route of the lump sum.
Lump Sums Can Create Problems
For people who are prone to burning the cash that's suddenly landed in their pocket, refuse to get financial advice or have family pressures, taking out the winnings in a lump sum can be more harmful than beneficial.
Study after study has shown that winners generally don't do well with the lump-sum option, and that's because they're not used to handling such large figures.
There are lottery winners who may do well with this option, but there are those who ruin their finances after a big win. For those types of spenders, having less access to their entire winnings is a better deal. So, rather than manage, say, $10 million, they may be better at managing $500,000 each year.
It's the Best "Do-Over" Option
While some winners may scoff at the annual annuity option, it does allow you a "do-over." We've heard of those big winners who lose everything in the blink of an eye - but, with the annuity option, if things go badly one year, there's reassurance in knowing that there is another chance to rectify things in the next year.
Make a Smart Financial Decision
Hitting the jackpot is the perfect chance to make some smart financial choices. Understanding your spending habits can help you make the choice that fits your own needs and interests.
With annuity payments, though, you will receive an amount closer to the actual jackpot, thanks to lower tax bands and lottery funds, and you are better positioned to manage your winnings over a period of time.
To learn more about how the Powerball game works, why not check out our comprehensive list of questions and answers?