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.






annuity payments

The Bond Bubble Threatens Your Annuity Payments

So you’ve found your way onto our website, deciding whether to sell your annuity payments. There are a number of different reasons that people want to sell payments. In this article, we want to highlight one reason that’s often overlooked-the annuity issuer’s ability to make your annuity payments.

It is generally accepted that the insurance company making your annuity payments and other claims is financially sound. But we think that when the global bond bubble pops, several insurance companies could go bankrupt or at least have severe difficulty meeting all of their liabilities. Granted, some will be in better shape than others, depending on their levels of risk. We’ve taken a look at the credit ratings of major annuity issuers (life insurance companies such as MetLife, Jackson National Life Insurance, New York Life, etc.) and added some further analysis to provide additional color.

We’re not there yet, but if you wait until the bubble pops and you really need the cash, the window of opportunity to receive a lump sum for your annuity payments probably closes. If it doesn’t completely close, you may be able to sell your annuity payments, but at an increased discount rate-meaning less money for you.

Insurance Company Downgrades

As insurance companies credit ratings get downgraded, the major annuity buyers (JG Wentworth, Stone Street Capital, Novation Settlement Funding etc.) become more cautious when making lump sum offers on annuity payments they fund. This stems from their own worries as well as investor fears about the sustainability of annuity payments.

Many structured settlement companies act like middlemen, buying the rights to your annuity payments, then packaging these future annuity payments together (into an investable financial product) and selling them to investors. This process is called securitization, and the future annuity payments now get paid to the investors. The risk is transferred from the annuity buyer to investors.

Financial Crisis Bankrupted JG Wentworth

Wall Street’s securitization machine is what fuels loan growth in today’s economy. A decade ago, it was the mortgage backed securities (MBS) that fueled the housing bubble. And we saw how quickly the spigot can be turned off when the music stops playing.

Structured settlements annuity payments are “asset backed securities” which are bundled and sold to investors seeking higher yielding investments. But without the investor demand, the third-party annuity buying slows to a halt.

This happened to JG Wentworth in 2009, when they declared bankruptcy following the credit crunch. Their credit lines froze up and the investor demand dried up-stopping the securitization machine in its tracks. As mentioned in our JG Wentworth reviews page, the company was left in an overleveraged position and had nowhere to sell their bundled annuity payments. As a result, they essentially stopped buying new payment streams.

JG Wentworth commented on the 2008-2009period, “We were forced to limit transaction volume without access to the securitization market and warehouse facility. We significantly scaled back new transactions…”. If you are considering selling annuity payments to one of the larger annuity buyers who is very active in the ABS market, you might consider getting quotes sooner than later. If the ABS bond bubble pops again, the window when selling an annuity could close once again.

Investment Returns Fund YOUR Annuity Payments

A life insurance company funds itself to meet its liabilities (YOUR annuity payments) in a couple ways- 1- customer premiums and 2- earnings on their investment portfolio (a massive war chest of money to pay out claims). For some of the larger portfolios, such as Met Life, we’re talking over half a trillion dollars. The investment portfolio of all life insurance companies has their white elephant in the room-rising interest rates.

Annuity Payment Risk: Interest Rates Rising

Today, interest rates are basically zero. Here’s why this is a problem-they have nowhere to go but up. And when they do, the investment portfolios we just described (which pay various types of annuities) will get hammered. Rising interest rates harm all existing bonds since with interest rates rising, the bonds with existing (lower) coupons) are less attractive. And the investment portfolios are made up of almost all bonds (or similar debt instruments such as bundles of loans in an alphabet soup of various forms, CLOs, ABS, CMBS, RMBS, etc.). The portfolios need the bond’s interest income to match claims.

Think about it: Let’s say you bought an investment grade corporate bond that currently yields an investor a fixed rate of 3%. If over the next few years, interest rates double-market rates are 3% and investment grade corporate debt is being issued to investors at 6% yields you’d be upset. You’re stuck getting 3% when you could get 6% like everyone else, had you waited.

As such, your 3% bond isn’t as attractive and its price will reflect it. The bond values could crash. Rising interest rates generally affect the higher quality bonds, investment grade corporates and Treasuries (lower rated bonds such as high yield and structured products are more affected by deflation).

The Bond Bubbles Duration Risk

It’s not just the interest rates rising, that’s so dangerous. It’s how the bonds will react to the rate hikes, known as interest rate sensitivity (known as duration). The longer the bonds have until maturity, the more they will be negatively affected by rising interest rates. We are at the highest durations on record.

We’re not exaggerating by saying that insurer’s investment portfolios are basically a giant bond-a junk bond. Still wondering, “Should I sell my annuity”? Hopefully you can view that question with a fresher perspective. If you are selling annuity payments, consider starting the process sooner than later by getting a quote.