Lottery Lump Sum or Annuity

Lottery Lump Sum or Annuity?

One of the most fun things to do is dream about winning the lottery. It’s something that has captivated me for years. Living in Florida, with its rich history of  I am an avid player of almost any type of lottery in existence. We’ve read numerous articles detailing the quantitative aspects of managing lottery winnings, mostly referring to the taxes involved and the various financial assumptions. Obviously, those factors are important but today we want to look at the lottery lump sum or annuity debate from a slightly more qualitative angle.

Lottery Lump Sum or Annuity? The Annuity Case

When making the case for taking a lottery payout in the form of  annual annuity payments, we want to clearly deliver this disclaimer-the vast majority of past lottery winners have chosen to realize their winnings in a lump sum. In fact, The skeptic in me says that perhaps this decision was influenced by those who would potentially benefit from such a scenario, namely money managers, accountants and attorneys.

Maybe we are just in the mood to be non-conformist this morning but we see plenty of reasons why the annuity option makes at least as much sense as the lump sum payout option. In the lottery lump sum or annuity debate, we want to at least present an opposing viewpoint given the overwhelming consensus for taking the lump sum. For one, you won’t have an army of financial advisors and other professionals to deal with. In fact, none of the studies we saw factored in the cumulative savings

If I won the lottery, the last thing I would need to be is aggressive. Look, you’ve already beaten the one in a million odds to tin the darn thing, now you want to parlay that luck into making the correct investment decisions . In reality, the lottery lump sum or annuity decision comes down to what returns you think you can achieve.

Maybe we’ve seen too much over the last thirty years but returns, while generally higher, have been all over the place for a variety of asset classes. Interest rates have been quite volatile, ranging from the mid-teens in the early 1980’s to basically zero that we have today. Where rates are going next is anybody’s guess. And the stock market has been substantially higher over this time period. You’re also betting that the market will be able to do it again over the next thirty years.

Lump Sum Payouts Bear the Investment Risk

Also, many lottery winners that chose the lump sum have gone bankrupt. By choosing the annuity payout option, you take the chance of . If you make a major screw up investing with your annuity payout one year, you can always start fresh the next year when your account gets replenished.

If you are the type of person that would enjoy having an entourage of professionals helping you manage your financial, legal and charitable affairs, then the lottery lump sum or annuity debate is a no-brainer-take the lump sum. Because that’s what you are going to need to manage if you take the lump sum. We say an army of financial advisors because to keep the money safe, you’d have to establish. This might be overkill but again, we are looking at the scenario from a conservative lens.

Here’s another reason you may want to select the lottery payout as an annuity is that it could deter ‘friends’ looking for a handout. One thing is for sure, if you win the lottery, you will have no shortage of friends to hang out with. And you will probably be contacted by cousins you didn’t know existed. Having an annuity option provides a built-in ‘out’ for many moochers. You could always just say “ Sorry, I’m on an annuity schedule and I have to wait until the end of the year for my payments or the next calendar year or whatever buys you the most time-they won’t know the actual annuitization schedule.

Of course, if you’re wondering, can I still sell my annuity once I’ve selected that payout method the answer is yes. Many structured settlement companies and annuity buyout companies will still pay you a lump sum, just at a discounted value. Many companies such as JG Wentworth, Stone Street Capital and DRB Capital may purchase lottery winnings paid out as annuities. These types of annuities are typically free to sell, unlike when you ponder, “should I sell my structured settlement” where a judge is required to sign off. Please read our JG Wentworth reviews as well as others, to see what former customers say about their experiences selling lottery winnings. Selling an annuity is a decision you should always think through carefully and it isn’t right for some people. But for many, it unlocks your own money, which can be used for anything you wish.

Why Most People Take the Lump Sum Payout

The empirical evidence shows that the overwhelming majority of lottery winners take the lump sum. In fact, only . That being said, we think the lump sum is still the best choice. But if you are risk averse and do not want all the hassle that goes into . One caveat is that by taking the annuity payout, you run the risk of rising interest rates since your annual increase, basically a cost of living adjustment, is usually set at around 4% per year. If interest rates got closer to more historical norms, say 6%, that would tilt the odds more in favor of the lump sum since you could roll over Treasury instruments at higher rates.

This article should not be construed as any cut and dry investment advice-it is simply a fun look at some different variables to consider when deciding the best way to take lottery winnings.