“The curse of losing lotteries is very real,” said Andrew Stoltmann, a Chicago-based attorney who has represented several recent lottery winners. One of the first decisions a winner has to make — whether to accept the jackpot as a lump sum or an annuity — often ends up being their downfall, Stoltmann said. More from Personal Finance: The Powerball jackpot is available. This is the tax bill Free returns at retailers may soon be a thing of the past Affluent shoppers are embracing second-hand shopping The jackpot for Monday night’s drawing is now the biggest lottery prize ever at an estimated $1.9 billion if you choose to take your windfall as an annuity spread over three decades. The cash advance option – which most jackpot winners choose – for this drawing is $929.1 million. These days, the annuity option is bigger than it used to be, relative to the cash option, thanks to higher interest rates, which make it possible for the game to fund bigger prizes with an annual annual cap, according to Multi-State Lottery Association, which administers Powerball. . However, “over 90% of winners get the immediate lump sum,” Stoltmann said. “That’s usually a big mistake.” Not only does an annuity offer more bang for your buck, but spreading out your payments also gives you the opportunity to build an experienced team, including an accountant, financial advisor and attorney to protect your money and your best interests. according to Stoltmann. “Few lottery winners have the infrastructure to manage a lottery windfall,” he said. This ensures a level of financial security that a lump sum does not, even with the inevitable onslaught of begging, over-buying or bad investments. “Making a mistake with the first year’s earnings is not catastrophic if the winner is going to receive payments for another 29 years,” Stoltmann said.
Annuity payments versus lump sum payments explained
Spreading the payments is worth it, “especially in light of the math and the psychology,” said Joe Buhrmann, a certified financial planner and senior financial planner at Fidelity’s eMoney Advisor. “Even if you spend it all, there’s another check coming next year,” he said. “There’s a lot of certainty in that.” Then there are the tax implications: Choose the cash option, and a 24% federal withholding tax is taken off the top — that’s about $223 million — with another hefty bill likely due at tax time. “The only discount you get is the cost of your ticket,” Buhrmann said. Of course, you’ll pay tax on the annuity checks too, but maybe not as much on the investment income if the government does the work for you (essentially putting the earnings into a bond portfolio rather than as you would have them invested). Although you could probably earn more by investing in the market over the same time horizon, there is much less risk since the annuity payments are guaranteed. Even if you die, future payments become part of your estate, just like any other asset. “Don’t get caught up in nickels and dimes,” said Susan Bradley, CFP and founder of the Flash Money Institute in Palm Beach Gardens, Florida. Either way, “the payoffs are huge and you’ll never be the same,” he said.
