We all dream of winning the lottery. It would change our lives and make us rich until the day we die. Statistically, that is actually not likely. You’re probably thinking, “Of course, winning the lottery is not likely.” But even if you did win the lottery, it is not likely that you’ll be rich until the day you die. Actually, 70% of lottery winners end up completely broke, some after only a few years.
Because of the likelihood of lottery winners running their wealth into the ground, state lottery agencies offer winners the payout options of taking their winnings as one giant lump sum, or getting smaller lottery annuity payouts each year for 25 to 30 years. The annuity settlement helps protect the financial well-being of the winner throughout their life. Here is a quick overview of The difference between lump sum and annuity payments when you win the lottery:
The Winnings
Lump Sum: If you opt for lump sum for your lottery winnings, the amount that you are actually awarded is not the amount that the lottery is advertised at. Lottery agencies reason that if you take the amount they give you and invest wisely, it will equal the amount that the lottery is advertised that over the course of 30 years. This is usually about 26% less than the advertised amount of the lottery winnings. In other words, if you won a $12 million jackpot, the amount you would be given before taxes will probably be about $8.88 million. This is flawed logic on behalf of the lottery agencies, because the amount that you could possibly invest would be after taxes, so it is not actually possible for you to wisely invest your entire winnings.
Annuity Settlement: If you opt to take the lottery annuity payout, you would get the full value of your lottery winnings over the course of 25 to 30 years. In our $12 million jackpot example, if the terms of your lottery annuity payout were 25 years, you would be given a check for $480,000 every year for 25 years. At the end of 25 years you would have all $12 million. So you make a little more money over a longer span of time with an annuity settlement.
Tax Implications
Another way that you stretch your meager lottery winnings a little further is by considering the taxes. However you decide to collect your lottery winnings, you will pay taxes for the total amount you take home in a single year.
Lump Sum: If you took a lump sum payment, the entire balance of your payment would be charged in the first year that you got it. If you won a $12 million jackpot, and took home $8.8 million, you would be subject to a federal income tax of 39%, or $3.4 million.
Annuity Settlement: If you chose to get an annuity settlement and took home $480,000 each year, you would probably be subject to federal taxes of about 29%, or about $143,000 per year.
To Sum It Up
Lump Sum:After with holdings and taxes, if you opted for a lump sum payment of a $12 million jackpot lottery, you would take home $4.9 million. While a lot less than $12 million, that’s still enough to change your life.
Annuity Settlement: However, if you opted to get annuity payments for 25 years, in the end, you would have amassed $8.4 million. This is $3.5 million more than the lump sum winner.