The multi-state Mega Millions lottery game holds at $266,000,000 (at the time of writing this post). If you became the lucky recipient of the Mega Millions (or Powerball), would you take an annuity payment or a lottery lump sum payout?
If you take an annuity payment, for the next 26 years you’re looking at about $39,500 for every million dollars won.
If you take a lump sum payout, payment varies state to state. For the sake of this article, we will consider taking a lump sum payout.
Because according to Craig Wallace, a senior funding officer who buys annuities for lump sum payments, states that its a better choice:
“People are far better off taking a lump sum and investing it than taking the annuity. It’s bad for my business, but it is definitely the way to go.
“If you choose the annuity, what you’re choosing is a fixed amount of money a year for 20, 25, even 30 years down the road. In some states the money will escalate somewhat. For example, in Colorado, the money grows at 3.7 percent a year on a 25-year payout. In Florida, the payments are stretched out for 30 years, that’s the worst in the country,” he says.
“You are subject to a change in the tax rate. You know what the tax consequences are now, but you don’t know how it will change. The value of your money decreases over time. I wouldn’t take that bet.”
“Take the lump sum. That’s definitely the way to go. You’re better off investing the money and taking charge of your own destiny.”
You’re the Winner
If you take a lottery lump sum payout, you are looking at a cash value of $165,200,00 (for this particular drawing in the state of CA).
*Woosh* That’s an overwhelming amount of responsibility. Do you know how you would handle that amount?
Don’t end up like these winners
- Suzanne Mullins won $4.2 million in the Virginia lottery in 1993. Now she’s deeply in debt to a company that lent her money using the winnings as collateral.
- “Winning the lottery isn’t always what it’s cracked up to be,” says Evelyn Adams, who won the New Jersey lottery not just once but twice (1985, 1986) to the tune of $5.4 million. Today, the money is gone and Adams lives in a trailer.
- Ken Proxmire was a machinist when he won $1 million in the Michigan lottery. He moved to California, went into the car business with his brothers and within five years, Ken had filed for bankruptcy.
- William “Bud” Post won $16.2 million in the Pennsylvania lottery in 1988 but now lives on his Social Security.
Play it Smart
As a personal finance blogger or reader, you are hopefully implementing the steps to become a financially independent person:
- Not Spending on Impulse
- Paying down debt
- Building an emergency fund to cover 6 month’s worth of expenses
- Investing in your 401K or Roth IRA
Those things don’t stop if your win a large sum of money. If you decided to take the lump sum payout then you may also need to consider hiring a Certified Financial Planner to help you manage such money.
What to spend it on
If you are a regular reader of my blog, you know it drives me bonkers that my husband spends $10 per week on lottery tickets. And we had that discussion again this morning. I ranted that for, ‘someone who thinks they are financially saavy… you could make a lot more saving and investing that $10 per week’. His response, ‘there is no gaurantee that a business is a safe investment either. Especially in this economy.’
It’s his little bit of joy to dream upon in life. I just chose to give him a hard time about it.
And he has his ongoing list of how the money would be spent: a ranch house, a big European vacation for his wife, a truck & bass fishing boat, and to help certain family members.
What would you do?
So as the lucky recipient of Mega Millions lottery winnings, would you take annuity payments or a lottery lump sum payout? And what dreams would you secure with your winning?