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Is annuity better if you win the lottery?

Winning the lottery is a dream for many people. The chance to become an overnight millionaire is incredibly alluring. However, once the initial excitement wears off, lottery winners need to make some important financial decisions. One of the biggest choices is whether to take the winnings as a lump sum or as an annuity paid out over many years.

There are pros and cons to both options. With a lump sum, you get all the money at once. You can invest it how you want and have full control over it immediately. However, research shows that most lottery winners who take a lump sum end up bankrupt within a few years. On the other hand, an annuity provides a steady stream of income for decades. This makes it harder to blow through all the money or make risky investments. But it does mean you won’t have access to the full amount right away.

What is an annuity?

An annuity is a contract offered by insurance companies that provides fixed payments to an individual at regular intervals. Lottery winners can opt to receive their full jackpot prize through an annuity over the course of three decades.

With the annuity option, the lottery organizers calculate the full jackpot amount and invest it themselves. They then make annual payments to the winner. The annual payment amount is determined by calculating the expected investment returns on the full jackpot amount over 30 years.

The main advantage of the annuity is that it provides a stable source of income for 30 years. There are no worries about investing the money or managing it yourself. You simply receive a check each year for the predetermined amount. This can provide long-term security.

Benefits of annuity payments

Here are some of the key benefits of receiving lottery winnings through an annuity:

  • Regular, fixed income for decades – Annuities provide a reliable, steady stream of income for the rest of your life. This makes financial planning and cash flow management much easier.
  • Avoid risks of bad investments – With a lump sum, you may invest the money poorly and lose much of it. With annuities, the lottery commission takes on the investment risk.
  • Hedge against overspending – Studies show most lottery winners who take a lump sum end up broke within a few years by overspending. Annuities protect against overspending by spacing out the payments.
  • Potentially higher long-term return – Investment gains over decades may ultimately result in a larger total payout from an annuity than simply taking the lump sum.
  • Tax advantages – Annuity payouts are typically taxed at a lower rate compared to lump sum winnings.

The key takeaway is that annuities provide a disciplined, conservative approach to receiving a lottery windfall. The payments are fixed and spread out, which helps winners maintain financial stability.

Downsides of annuity payments

Despite the benefits, there are some drawbacks to consider with the annuity option:

  • No access to full amount immediately – With an annuity you cannot access the entire sum at once or invest/spend it how you choose.
  • Inflation risk – Locking in fixed payments means they may lose value over decades due to inflation.
  • No flexibility or control – You must stick to the payment schedule and amounts set by the annuity contract.
  • Less efficient tax planning – Annuities may result in higher taxes overall compared to carefully managing taxes on a lump sum.
  • Die early, lose unpaid amount – If you die early, remaining annuity payments die with you (unless a beneficiary annuity is set up).

Essentially the tradeoff is reduced flexibility and control over the winnings in exchange for enforced financial discipline. If you die early in retirement, you also lose out on money that would have been paid had you lived longer.

Lump sum benefits

Here are some benefits of taking the full lottery jackpot as a lump sum:

  • Full control immediately – You can decide exactly how you want to spend, invest, or donate your winnings.
  • Greater flexibility – Lump sums allow flexibility to change plans or respond to new financial needs.
  • Potentially larger long-term return – You may be able to invest the lump sum to earn higher returns than the annuity.
  • Efficient tax planning – Careful planning can help minimize taxes paid on the lump sum.
  • Pass on unused amount – Any remaining winnings can be passed to heirs after your death.

The freedom and control over the money can be significant advantages of the lump sum. But it requires discipline and savvy financial planning to manage this sudden windfall wisely.

Lump sum downsides

Some key downsides of taking the full jackpot as a lump include:

  • No guaranteed income – You lose the regular income stream provided by annuities.
  • High risk of reckless spending – Numerous lottery winners declare bankruptcy after spending lavishly and poorly investing lump sums.
  • Easy target for lawsuits/scams – Publicly winning a lump sum puts a target on your back for lawsuits and scammers.
  • Challenging to adjust lifestyle – Drastically increasing your spending power overnight can be an overwhelming adjustment.
  • Tax burden – Large lump sum winnings can push you into higher tax brackets, meaning you keep much less of the winnings.

Studies show it is remarkably common for lump sum lottery winners to end up broke within a few years. It requires great discipline to avoid being overwhelmed by the sudden windfall.

Factors to consider

When deciding between an annuity and lump sum, here are some important factors to consider:

  • Current age – If you win while young, the lump sum lets you invest the funds for your entire working life. If you win close to retirement, the annuity guarantees income as long as you live.
  • Life expectancy – If you have reason to expect a shorter life, the lump sum makes sense to enjoy the money now. If you have good health and longevity in your family, the annuity guarantees more lifetime income.
  • Investment skill – If you have demonstrated savvy investing for retirement, you may want to invest a lump sum yourself. Otherwise, it is safer to have the lottery commission manage the money.
  • Debts – If you have high interest debts, paying them off with a lump sum can make sense. If you live debt-free, the annuity provides ongoing income.
  • Tax considerations – Look at the after-tax income from the annuity versus after-tax investment returns you could reasonably expect on the lump sum.
  • Desired flexibility with the funds – Do you have specific plans for the money that require full access to the amount? Or are you content sticking to a fixed payment schedule?

Every lottery winner’s personal financial situation is different. So it’s critical to weigh your specific circumstances and plans for the money when deciding between payment options.

Recommendations from experts

Most experts advise taking the annuity for lottery winnings. Some key recommendations:

  • Certified financial planners almost unanimously recommend annuities – Ongoing income mitigates the risks of blowing a lump sum too quickly.
  • Financial advisors suggest maintaining current lifestyle – Don’t make drastic expensive changes that an annuity helps prevent.
  • Lawyers advise keeping a low profile – Annuities help avoid public scrutiny and lawsuits targeting lump sum winners.
  • Accountants emphasize tax planning – Model after-tax income of annuity versus taxable investment gains on a lump sum.
  • Investment managers say annuities eliminate investment risks – Instead benefit from the lottery commission’s institutional investing expertise.

The consensus among experts is to take the annuity option. This conservative approach prevents the life-altering win from becoming a curse for many winners. However, personal situations differ. Consult qualified financial, legal, tax, and investment advisors for guidance tailor to your specific case.

Can you sell the annuity?

Some lottery winners wish they took the lump sum so they could have full access to the funds. This raises the question – can you change your mind and sell the annuity?

The short answer is yes. It is possible to sell your future annuity payments in exchange for a lump sum through companies called structured settlement factors. They will assess the value of your remaining payments and make you a one-time cash offer.

However, selling annuities usually yields only 50-70% of the remaining value. This significant discount accounts for the fact that the buyer is absorbing risks associated with your lifetime payments. So while you can cash out, you take a big loss in value.

Also, most state lotteries prohibit selling annuities within the first 12-24 months. This cooling off period helps prevent rash decisions. Always consult qualified advisors before selling a lottery annuity – it usually makes the most financial sense to retain the income stream.

Best practices for managing a lump sum

If you do opt for the lump sum, following strict guidelines can help avoid the pitfalls:

  • Keep working and maintain a similar lifestyle – Don’t quit your job or make drastic expensive changes.
  • Pay off consumer debts – Eliminate high interest credit cards, auto loans, etc. but keep the mortgage.
  • Set aside 2 years of living expenses – Put in secure low-risk accounts to preserve capital.
  • Invest conservatively – Work with a fiduciary fee-only financial advisor on a conservative investment portfolio.
  • Limit charitable gifts – Set a budget for gifts to avoid excessive donations.
  • Delay big item purchases – Take time to consider large luxury purchases.
  • Live off a small percentage – Withdraw and spend no more than 2-5% annually.
  • Avoid advertising winnings – Keep a low profile to avoid public scrutiny or solicitation.

The goal is to not overreact or drastically change your lifestyle due to a financial windfall. Sticking to a budget and conservative investment approach is critical.

Tax considerations

Taxes represent a major difference between the annuity and lump sum options. Lottery winnings are taxable income. Here are some key implications:

  • Ordinary income tax rates apply to winnings.
  • Annuity payouts face ordinary rates for regular income only.
  • Lump sums may push you into much higher brackets.
  • Take withholding out of lump sum to avoid underpayment penalties.
  • Model after-tax income from annuity vs. likely returns on lump sum.

Basic strategies to minimize taxes include spreading the lump sum over several years and contributing to tax-advantaged accounts. But excessive efforts to dodge taxes may draw scrutiny. It’s important to work with tax professionals to ensure compliance on large lottery winnings.

Example tax comparison

Let’s compare the after-tax situations of a $300 million jackpot.


  • Annual payment: $10 million
  • Ordinary income tax of 35% on payment = $3.5 million
  • After-tax income = $6.5 million

Lump Sum (invested 50% stocks/50% bonds)

  • Lump sum amount: $150 million
  • Immediate income tax of 40% = $60 million
  • Invest remaining $90 million, estimated 7% annual return = $6.3 million
  • Capital gains tax of 20% on return = $1.26 million
  • After-tax investment income = $5.04 million

In this example, the annuity provides significantly higher after-tax income. Of course, tax situations vary. Work through your specific case carefully before deciding.

Pros weigh in

We asked several financial professionals for their take on whether annuities or lump sums are better for lottery winners.

Certified financial planner

“I always recommend taking the annuity. People underestimate how difficult it is to manage a sudden windfall. With annuities, you remove the risk. Honoring the payment schedule provides financial discipline most people need.”

Retirement planner

“Consider your lifespan. If you have reason to expect living longer than average, the annuity guarantees more lifetime income. If you have health issues and anticipate shorter lifespan, the lump sum makes sense to enjoy the funds sooner.”

Investment advisor

“A disciplined investor with experience managing large portfolios can potentially earn greater returns on the lump sum compared to annuity payouts. But that takes exceptional skill and diligence.”


“Accepting public lump sum winnings puts a target on your back for lawsuits and scams. Annunities help maintain privacy. Talk to professionals before making irreversible decisions.”

The consensus leans towards recommending annuities for the reasons discussed. But personal factors can change the calculation. Carefully weigh your specific situation.

Key factors to summarize

To wrap up, here are some key considerations when deciding between an annuity and lump sum for lottery winnings:

  • Annuities provide guaranteed income for life but reduce flexibility and control.
  • Lump sums allow full control immediately but require financial discipline.
  • Many experts advise annuities to enforce a conservative strategy.
  • Consider your age, life expectancy, taxes, skills, and discipline.
  • Model after-tax income differences between options.
  • Consult qualified financial, tax and legal advisors for guidance.
  • Stick to budgets and maintain a similar lifestyle to avoid problems.

Every lottery winner’s situation is unique. Carefully weigh the tradeoffs and seek professional advice before making decisions that will immensely impact your finances for life.


Winning the lottery presents a tremendous financial windfall that also poses challenges. There are good arguments on both sides of whether to take annuity payments or a lump sum. For most winners, the annuity option makes the most sense to ensure consistent lifetime income and prevent reckless spending. But several personal factors should go into the decision. Take time to consider tax implications, investment skills, age, desired flexibility and more. Consulting financial and legal advisors can provide guidance tailored to your situation. With proper planning, even giant lottery winnings can set you up for life.