Lottery winners feel on top the world, they feel as if they are the luckiest people alive and who can disagree with them, the chances of winning a lottery is next to nothing and depends one hundred percent on pure luck.
Most lottery winners are presented with two options for payment: get your winnings as a lump sum or spread it as an annuity. This might seem straightforward, we all want to receive our winnings at once, every penny of it in our bank account. We want to know that we really won the money and are afraid of the risks associated with delaying the payment process. Risks such as what if the lottery folds up, what if the lottery owners are no longer willing to pay me in the long run, what if I die soon and many more.
Before you choose any of the options presented, let me weigh the pros and cons of both options for you and then we can decide with is better: the lump sum or the annuity lottery payment.
Lump Sum
A lump sum can be defined as a single payment that is paid instantly. A lump sum payment option entitles you to receiving all the money you won in a single payment rather than spreading payment over the long run with multiple payments.
Pros of the lump sum
- You can easily and quickly pay off debts and solve other pressing matters with the money you collect.
- You can use the money to make big investment decisions that can be profitable for you in the long run.
- You have more financial flexibility.
- You have a larger sum available for your usage.
Cons of the lump sum
- Poor money management can make you lose all the money quickly
- Taxes and other deductions can take a toll on the lump sum.
Annuity Payment
An annuity can be defined as a multiple payment option that is spread across a time window and paid at regular intervals. The regular intervals could be monthly, bimonthly or yearly. With the option of annuity payment, your gradually collect a part of your winnings on an agreed time basis such as monthly, bimonthly or yearly.
Pros of Annuity Payment
- You will receive a steady flow of income for a period of time.
- Better money management.
- Over the long run, the annuity payment is bigger than the lump sum.
- Taxes are typically lower with annuity payment than with the lump sum.
Cons of Annuity Payment
- The annuity payment may not be large enough to cater for what the receiver intends to do.
- The currency’s value might depreciate over time and cause loss for the receiver.
- Reduced financial flexibility
- The possibility of death before you get the full annuity payment.
Lump Sum vs. Annuity Payment: Which is the better lottery payout option?
If you carefully observe and examine the pros and cons of both the lump sum payment and annuity payment, you will discover that there is really no outright better lottery payout option. Both payment options can be profitable under certain conditions and of a massive disadvantage under certain conditions.
To analyze both options, there are a combination of factors you need to look at before making a decision. Lottery winners have to make this decision quickly so if it is necessary you get to know which choice you would make now rather than later. Some of these factors include: how long do you expect to live, how good is your investment skills and the investment opportunities and the tax question.
How long do you expect to live?
This is straightforward on the surface, if you are young then you can choose the annuity lottery payment and get paid for a period of time as you likely have many years to live. A young person choosing an annuity lottery payment gets financial security, a comfortable standard of living over a long period and the total sum over the long term ends up been bigger than if the young person had chosen a lump sum.
For an old person, you will naturally choose to take the lump sum because you are not sure of how long you will live and if you will live long enough to enjoy the full benefits of the annuity lottery payment. As an old person you can still choose the annuity lottery payment, because even in the event of death before the annuity lottery payment is complete, your heirs get to inherit it.
Lottery winners in general both young and old prefer to take the lump sum lottery payout option. The problem with lump sum is that most lottery winners get it as easy money and as a result squander it easily. It is not uncommon to hear of many lottery winners who made so much money from lottery and in less than five years they have lost it all.
How good is your investment skills and investment opportunities?
Your investment skills and acumen and the investment opportunities available to you is another factor you should consider when choosing between taking a lump sum or an annuity lottery payment.
If you have good investment skills and an eye for spotting a good investment opportunity, or you have good financial advisors and a reputable brokerage that can make good investment decisions on your behalf, then you have to take the lump sum option. Taking the lump sum and investing it profitably can increase the money available to you and end up been more profitable than the total amount you would have accumulated with the annuity lottery payment.
You can also use the lump sum and invest it in annuity payment options offered by private companies. Typically, the annuity rates of these private companies are more than what the lottery offers. The problem with this is finding a reliable private company that offers fixed annuity payment that will not fold up before you get your full annuity payment.
If you have poor investment skills and are a spendthrift, then the better option for you is to go with the annuity lottery payment option. Do not be in the category of people that nursed the belief that they can handle and manage the lump sum payment, a vast majority of lottery winners today do not look like they were ever lucky and this is because of poor management of the lottery lot. Annuity lottery payment will not solve your spending habits, but it will help you manage your money by spreading out fixed payments over a period of time.
The Tax Question
Collecting a lump sum from a lottery company as opposed to the annuity lottery payment will carry a higher tax rate. For example, if you played a national lottery and you are lucky to win the star prize of $20 million. If you choose the lump sum payment your tax rate in the year will be high as you will be considered a high earner and be taxed accordingly with high earners. On the other hand, if you choose the annuity lottery payment and are paid $125,000 over the course of 20 years, your overall tax payout will be less than with the lump sum. The tax estimation is in general terms though and can be slightly different for different states, countries and other reasons which you should consider in full before choosing a lottery payment option.
Conclusion
It is common for lottery winners to get carried away by the euphoria of winning a large sum of money they never expected to win, luck can make you so happy you can feel the whole universe smiling back at you. In the process of jollification, the lottery company offers you two options for you to choose one: collect the full sum won in one payment (lump sum) or spread out the payments over a period of time (annuity lottery payment).
The default option is to maximize your luck and collect everything as a lump sum. The wiser option is to weigh the pros and cons of both options and individual factors that can influence both options before making a decision. Individual factors such as how long do you expect to live, how good is your investment skills and the investment opportunities can point you in the right direction and the tax question.
In terms of overall analysis, the lump sum offers you the opportunity for you to maximize your winnings while annuity lottery payment offers you the opportunity for better financial security. The choice is in your hands, choose between the lump sum lottery payment (maximizing your winnings) and the annuity lottery payment (better financial security).
