Are you one of the millions of Americans dreaming of winning the lottery? Chances are, the image of practically having enough cash to fill a swimming pool in your brand new estate in the Hamptons has crossed your mind one idle Tuesday afternoon. The odds of anyone winning the jackpot are impossibly against you for the most part, but if you do win the lottery – whether it’s half a million or $1 million – are you going to take all of the cash home right then and there and risk belonging to the 70% of lotto winners that spend it all in at most 5 years? Or will you put your money in the hands of a company that can help you out with lottery annuity, and possibly receive a sizeable check in the mail every year?
Before making this decision, it’s important to first understand what lottery annuity is. Essentially, this is choosing to receive your cash prize according to a preset payment scheme. You can either leave it up to the lottery company, such as Mega Millions, to handle your lottery annuity, or get a life insurance company to really sit down with you on the finer details and features of the scheme you want. Mega Millions’ structured settlement annuity benefits, for example, includes an immediate payment upon winning, followed by 29 yearly payments, each 5% more than the previous. If you let a life insurance company handle your payments, you can choose how long you receive your payments — even as long as you and your spouse are still alive.
Even though taking the lump sum and buying a mansion and a chauffeur-driven luxury car seems a lot more fun than stowing your cash somewhere and slowly nibbling at it over a span of 25-30 years, you’ll find that the latter is a more sensible financial decision, primarily because of the following reasons:
- If you choose the lump sum, you will only get roughly a little more than just half of the advertised jackpot value.
- Opting for annual lottery payments saves you from getting bumped up to a higher tax bracket, just because you payed a high income tax upon receiving your lump sum. You only have to pay taxes for the amount you received that year.
- Not having the lump sum at your fingertips prevents you from squandering the money and launching yourself into a non-sustainable lifestyle that could leave you in a worse financial situation than before you won.
- Even if you do mismanage your yearly payment, you will have the whole of the next year to fix it, because you still have a sizeable amount of money coming your way.