Everyone knows they have two options when they win the lottery. But what if there was a third one?
Someone in South Carolina has a decision to make. That person won the Mega Millions jackpot — $1.54 billion dollars — and now has to decide what they’re going to do with it. They have two choices. The first choice, a lump-sum payout, gives them all the money, right away. The second option is an annuity. But there might even be a third option. Obviously, this article isn’t to be construed as financial advice for any lottery winner, period. It’s just food for thought, and nothing more than that; anyone who wins the lottery needs to talk to a financial professional — the kind of person this blog is actually intended for.
“Two [payout options] diverged in a yellow wood.”
No matter what happens, a lottery winner has to deal with federal income taxes. The winner could decide to take the hit all at once, and take a one-time payout, with the taxes withheld for the federal government. In this case, that means the take-home pay would be something like $878 million, according to USA Today. Or the winner could decide to take their payout year by year, probably for thirty years. That allows the balance of their lottery account to grow tax-deferred, but winners still have to pay taxes when they withdraw the money. Generally, the wisdom is that people who take yearly payouts get a bit closer to the promised total of the lottery payout (e.g., if the person in South Carolina takes the monthly payments, their grand total, if they live another 30 years, means they get closer to the $1.54 billion they were hoping for).
The benefit of a monthly payout, ostensibly, is that the winner gets an income stream for life. They avoid financial-planning pitfalls, like spending all of their lottery winnings at once — hypothetically buying, let’s say, 6,362 high-end Teslas, or whatever. The winner doesn’t have to worry about being improvident.
Lump-sum payouts have their own advantages, though. The winner has more control over their money, and could reinvest in real estate or other ventures. The winner won’t have to worry that the entity paying the money will run out of cash before the 30-year mark. And they won’t have to worry about dying before they can enjoy their winnings. With the annuity option, the payments are somewhat inflexible. With a lump-sum payout, a winner would have near-total control of the situation and their money.
What if there was a third option?
Hypothetically, a winner could take the lump-sum payout option on their lottery winnings — the $878 million, in this 2018 case — and invest some of it into a fixed-indexed or fixed annuity as part of a balanced financial portfolio tailored to their specific risk tolerance by a professional financial advisor. The benefit would be this: The winner could still take payments for life on part of their winnings (one of the advantages of the “annuity” option offered by the lottery). They would know that, no matter how improvident they were, they would have a guaranteed income stream for life¹, and that they could pass that money on to their heirs when they die. So, they get the payments for life, except the person who won the lottery would have more control over what kind of annuity contract they were entering into. They could talk with their financial advisor and make sure they were investing in a fixed annuity that was right for them and their family.
Again, all of this is hypothetical, and no one who wins the lottery should do anything without speaking to a financial professional. But when it comes to hitting the jackpot, people should consider all of their options carefully. And when people say there are only two options for something — black or white — a savvy person will know that there should be at least a third option, if not more, depending on how you look at the situation.
FOR FINANCIAL AND PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.
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