Becoming the next jackpot winner can be a life-changing experience. But while faced with sudden enormous wealth, these lottery winners have a big decision to make. Should they cash out annual payments, or take the lump sum? Many experts have weighed in and insist on taking the lump sum, but why is that?
Lottery winners take the lump sum because it allows you to earn more money down the road than annual payments. If you invest your earnings correctly into high-yield options like stock, you can accumulate more wealth over time compared to receiving your money through annuity payments.
In this article, we’ll be going in-depth into why lottery winners take the lump sum, the differences between lump sums and annual payments, as well as other factors lottery winners should be aware of when making this kind of decision. If you’re interested in learning more about these topics, keep on reading.
Benefits of Taking the Lump Sum
Winners of the lottery can receive a one-time cash payout or choose to receive their winnings through annual payments.
There are benefits to both these options, but many experts insist that you take the lump sum, as you’ll accumulate more wealth long term. Below, we’ll explore some of the main reasons why lottery winners will benefit the most from receiving their earnings.
You’ll Earn More Money Long Term
When lottery winners receive their earnings through a lump sum, they can immediately invest a large portion of that into high-yield options like stocks.
By cashing out the lump sum and investing in it wisely and correctly, you’re guaranteed to have more money in the long run instead of taking the annuity, which leaves winners with some uncertainty in terms of what they’ll be receiving each payment after tax.
With the annuity, your payment will be dispersed differently, with winners receiving one immediate payment, followed by 30 payments over 29 years. If you choose the lump sum, handle your winnings correctly, and choose to invest in a large portion of it, you’ll see more wealth than someone who chooses annuity. Check out our annuity payout calculator to get a better idea of the actual figures.
There Is More Certainty With a Lump Sum
As we briefly stated above, there is a lack of certainty when choosing the annuity as opposed to the lump sum.
When choosing a one-time cash payout, you know exactly what you’ll be earning after state and federal tax as they exist once the money is won. With the annuity, you are slowly collecting your wealth over a longer period.
State and federal taxes are subject to change, so the amount of money you receive per payment may differ, leaving you with less money than the lump sum.
While some might believe that annuity will leave you with more money in the long run, the tax implications can leave winners with less money than they originally figured.
There are many advantages to immediately receiving your earnings through a lump sum payment. You don’t have to wait to have access to all your earnings, and you can immediately put your money towards smart investments like real estate and stocks.
There’s also more certainty with a one-time payment, as you won’t have to wonder how much you’re receiving, unlike those waiting for their annual payments. It’s clear to see why many sources insist on winners taking the lump sum.
You Get Your Money Immediately
If you choose the annuity, you’ll make a portion of your earnings after taxes in about 30 years.
With a lump sum, you immediately accumulate all the money you have earned right then and there. There’s no waiting period or yearly payments involved, and that’s one of the main attractions that lump sum payments have on lottery winners.
If you have an emergency or costs that come up, that money will come in handy, and you won’t have to worry about waiting until your annual payment has arrived to take care of any expenses that may come up.
As we stated above, the main appeal of the lump sum is that winners don’t have to wait to receive their winnings. This is definitely something to consider when choosing between the annuity and the one-time payment.
Why Some Choose Annual Payments
While many experts insist that taking the lump sum is the ideal choice, there are benefits to choosing the annuity that we will explore.
Easier to Budget
While a lump sum gives you your money upfront, many lottery winners find annual payments easier to budget and control as opposed to one large sum of money.
When you suddenly find yourself handed millions at once, it can be overwhelming, and many lottery winners are known to blow it all away in a short period. With the annuity, the steady stream of income that comes in won’t be so daunting, and is easier to control and will keep winners from overspending.
Many lottery winners who have chosen the lump sum option have faced bankruptcy due to poor spending habits. Annual payments over 30 years will keep winners from becoming overwhelmed with their newfound wealth and help them make smarter financial decisions.
Ensures a Certain Amount per Year
With the annuity, winners are guaranteed a certain amount per year, which leaves a sense of ease and peace of minding for those knowing that there is a set income.
As stated above, without a set financial plan or budget, a large lump sum can cause some winners to blow through their winnings fairly quickly. A guaranteed income that will come in annually eases a lot of anxiety for those who may rely on that extra source of money.
Once winners stop working and ease into retirement, this extra income that comes in will give you something to look forward to and will help provide for you and your loved ones in the years to come.
Helps Protect Your Assets
Receiving an annual income from your lottery winnings also allows you to protect your assets from yourself as well as others. We stated earlier how easy it is for lottery winners to become over-eager when faced with enormous wealth.
This annuity is a great way to establish boundaries with people who may show up and knock on your door looking for handouts once your payment has arrived. With an annual payment, your resources per year are limited, as opposed to a lump sum.
These limited payments also allow you to stay in check and be more careful with your funds. Those who feel they’ll use a lump sum irresponsibly, or be faced with an overwhelming amount of requests from others for handouts, choosing the annuity may be the safest option.
What to Be Wary of if You Choose the Lump Sum
We’ve discussed multiple benefits of both the lump sum and annuity options when it comes to winning the lottery. While many experts and financial advisors urge jackpot winners to take the lump sum, there are some disadvantages that winners should be aware of.
Lack of Self Control
We briefly discussed how a lack of self-control could turn a lottery winner into a bankrupt individual. This is something you want to be mindful of, as coming into this kind of wealth suddenly can be shocking for some.
It’s important to have a plan and a budget in place before you acquire your lottery winnings. Acquiring this kind of money will bring with it requests from friends, family, and multiple charities asking for handouts.
According to multiple studies done, 70% of all lottery winners who took the lump sum ended up going broke, and 1% of lottery winners go bankrupt every single year.
Being mindful of where your money ends up, as well as how often you spend your earnings, is key to keeping your wealth, as well as your budget under control.
Lack of Budget/Financial Plan
When faced with such a large amount of money at once, not coming up with an appropriate financial plan is a big mistake.
You’ll want to gather a team of advisors that will help you organize your spending and create a plan for you and your future. Creating a successful financial plan will help you spend your money wisely, set you up for a comfortable future, while also making room for pleasure spending.
It’s important to set up two different tiers of spending, one for more frivolous and fun purchases, and another that makes up more important spending decisions that require more time and effort.
Not creating these two separate tiers of spending will mostly cause you to overspend, which is not ideal and is likely to cause more frivolous and fun spending than intended.
Coordinating with the correct advisors and keeping track of how you organize your funds is key to spending your lump sum wisely, and making sure your wealth doesn’t disappear too quickly.
It’s vital to be wary of these factors if you choose the lump sum option when collecting payment. Having boundaries set with yourself and others, as well as a strict financial plan, will keep you and your money right where it needs to be.
What to Be Wary of if You Choose Annuity
Similar to cashing out a lump sum, there are factors that lottery winners should be mindful of if they chose to receive annual payments from their winnings.
Limited Amount of Money
As we stated previously, a slow stream of annual payments can result in a lack of resources at the end of the day. When unexpected costs show up, the money you earn from an annual payment doesn’t go as far as payment from a lump sum.
This is a factor that lottery winners should be mindful of when choosing how to accept their earnings. Money that you could have right then and there is put off, and it may be a long while before you collect the payment you could have needed previously.
While a lump sum gives you access to all the money you’ve earned right away, annuity brings long waiting periods for those who may need to get a hold of their funds.
Tax Rates Could Increase
While receiving annual payments over 30 years, federal and state tax rates are likely to change. This means that the amount of money you end up receiving can differ depending on the rates.
With lump sums, your earnings are taxed once before you receive them. But with the annuity, they are taxed consistently before each payment that is due to you. This leaves a level of uncertainty and consideration of how each payment you receive may look different from the one before.
This is another reason why experts insist on winners taking the lump sum. There is much more certainty attached to lump sums that are not promised with the annuity.
With more of your annual payments landing in the government’s pocket when rates go up, you’re left with less of your winnings in the long run.
You May Not Have Time to Enjoy All of Your Winnings
It’s important to remember that these annual payments will be paid to you within 30 years. For some lottery winners, there is the possibility that one might pass away before they can fully enjoy and/or invest in their earnings before they die.
While you can choose a beneficiary to receive the remainder of your payments, in the case of your death, a lump sum of money that has already been received would make it easier on those who may rely on that money to pay necessary bills and costs that would accumulate during that time.
These are just some of the factors you should consider before you decide on before accepting annual payments that you’ll receive over 30 years.
Contact a Tax and Estate Expert
Before lottery winners make a final decision, it’s highly recommended that they speak to an expert that can examine their financial background to see whether a lump sum or annuity is their best bet.
Talk to an Expert About What Option Best Suits You
Speaking with an expert of this nature allows you to plan in a lot of different ways. Not only will you receive guidance on how you should accept your money, how to budget properly, and how to move your money around when unexpected costs hit, it will also be explained and shown to you.
You and your advisors must come up with a plan that’s best for you and your family. Plans that should be made ahead of time should explore many different avenues, so winners are prepared for anything. Factors such as how much money you should spend on more “fun” purchases each year, how much you’ll invest, how much you should save for unexpected expenses that may pop up, and how much you’ll give to charity.
Separate Your Winnings Into Different Tiers
As we stated previously, separating your financials into at least two tiers of spending will keep your spending habits and budgeting on track.
Financial advisors are more likely to recommend winners taking the lump sum because it’s easier to begin separating your funds into different tiers when it’s all accounted for already.
Most states have different rules in terms of how long you have to collect your lottery winnings, but usually, you have anywhere from 90 days to a year to claim your prize. During that time, you can strategize a plan that helps you get the most out of your money earned.
Speaking to an advisor is a great way to successfully plan what you’ll do with your payment, no matter how you choose to receive it. If winners choose to accept a lump sum, they’ll be better equipped to handle such a large amount of wealth handed to them at once.
Lottery winners who are famously known for blowing through their wealth within the span of a few years had no financial plan or budget in mind.
To be safe and responsible with your winnings, one must be able to make realistic goals in terms of how much you’ll be spending per year and where your money will end up. If you approach it correctly, collecting the lump sum can be a smart investment that you and others will profit from in the years to come.
So why do lottery winners take the lump sum? We explored multiple reasons as to why multiple experts recommend that jackpot winners take the lump sum.
For one, a one-time payment guarantees more money long term when you immediately invest in it correctly. There’s also more certainty within a lump sum than an annual payment that’s taxed each year as opposed to just once.
While most tax experts usually recommend lump sums, we discussed the benefits of annuity and why may winners go this route. Many winners find annual payments easier to budget, and it also ensures a guaranteed income will come in each year.
We also discussed multiple factors you should be wary of before you choose either the lump sum or the annuity. Either way, you must talk to an expert before you make your final decision.
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