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Is it better to take the lottery as a lump sum?

The Main Options for Collecting Lottery Winnings

When you win the lottery, you typically have two options for collecting your prize money:

1. Take the full amount as an annuity – This means you receive a portion of the total prize each year over the course of 20-30 years. The lottery will make annual payments to you, investing the rest and paying you a rate of return during that time.

2. Take a discounted lump sum – You get the full prize amount upfront, but it is less than the advertised jackpot. The lottery takes the amount invested, subtracts taxes, and pays you the remainder immediately. This amount is often 50-60% of the headline prize total.

So which option should you pick if you win the lottery? There are good arguments on both sides, which we’ll explore in depth in this article.

The Case for Taking the Annuity

Here are some reasons why taking the annual lottery payments could be the better choice:

– It protects you from spending too quickly. Getting a big lump sum all at once could tempt you into blowing it all irresponsibly. Annual payments force you to budget and spend wisely over decades.

– It provides stable income for life. You don’t have to worry about your money running out or investing it yourself with the annuity. The lottery will pay you every year for 20 or 30 years no matter what.

– Payments increase over time. Most lotteries pay a guaranteed rate of return on the invested principal. That means your annual payments get bigger each year to help keep up with inflation.

– You pay taxes slowly. With the annuity, your income and tax rate are spread out over many years. With a lump sum, all the taxes are due immediately and could push you into a higher tax bracket.

– No investment decisions or risks. You don’t have to be savvy about investing and managing your money. The lottery takes care of growing and paying out the funds responsibly.

– Annual payments are still millions. Even if you win a huge $500 million jackpot, getting $10-20 million every year is pretty great and can fund an amazing lifestyle.

The Case for Taking the Lump Sum

Here are reasons you may want to consider taking the upfront discounted lump sum:

– Take control of your money. You can invest and use the funds however you want rather than relying on the lottery’s investment strategies and payment schedule.

– Invest for possibly higher returns. With smart investing you may be able to grow the lump sum into more than the annuity payments would have been. But there are risks.

– Use it for major purchases. It gives you immediate access to millions rather than having to wait years for annual payments. You can buy homes, cars, etc.

– Don’t trust the lottery’s solvency. You may fear the lottery could go bankrupt down the road before all payments are made. A lump sum avoids that risk.

– You could die early. If you don’t live 20+ years to receive all the payments, you end up losing most of the jackpot for your heirs.

– Pay taxes all at once. It can be easier to pay the taxes on your winnings in one lump sum and get it over with. You know your rate for the year.

– Invest in your own annuity. You can put some of the lump sum into a DIY annuity to create stable income for life. The payouts may be bigger than the lottery’s.

– Winning attracts lawsuits. Getting the lump sum reduces risks of future lawsuits eating into years of annuity payments.

As you can see, there are good points on both sides. There’s no definitively right or wrong choice. The best option depends on your financial situation, personality, and risk tolerance.

Tax Rates Can Impact the Decision

Taxes play a role in deciding between the two options. Lottery winnings are taxed at the highest federal rate, 37% as of 2019. Some states also tax lottery winnings above 5-7%.

With the annuity, your payments are taxed annually as ordinary income. With the lump sum, taxes are owed all at once in the year you win. This could bump you into much higher tax brackets.

For example, let’s say you win a $300 million jackpot and the lump sum amount is $180 million after the lottery’s reduction. Taking the full $180 million in one year could put you in the 37% federal tax bracket. You may owe over $60 million in federal taxes that year. Suddenly your $180 million became $120 million.

However, if you took the $300 million as a 30-year annuity, getting around $10 million per year, your income would be lower so your taxes would be lower. You would owe 37% only on amounts over $510,300 each year (2019 single filer brackets). Spreading out the tax liability leads to owing less overall in taxes.

What Financial Experts Recommend

We’ve looked at logical cases that can be made for both options. But what do professionals who manage money actually recommend?

Most financial planners advise taking the lump sum. Famous winners like Brad Duke and Cynthia Stafford took lump sums, following advice from their financial advisors. The key reasons they recommend it are:

– You can generally earn better investment returns yourself than the lottery’s annuity growth rate. The lottery invests conservatively to be able to definitely pay out over 20+ years. As an individual, you can take on some smart risks that could earn 6-8% annually vs the lottery’s 1-2% growth. Compounded over decades, even just 3-4% better returns per year makes a massive difference.

– It gives you control and flexibility. Financial planners can help you create customized investment strategies, income streams, and spending plans tailored for your goals. Rather than follow the predefined lottery schedule.

– Lotteries have some risk of bankruptcy. States have faced budget crises putting lottery funds at risk. Taking the lump sum avoids any chaos if payments cease years down the road.

– Dying prematurely is a real risk. You need to live long enough for the annuity to pay out more than the lump sum amount. That’s no guarantee if you’re hit by the proverbial bus next year. May as well take the lump sum while you can.

However, planners say if you don’t trust yourself with a huge lump sum, can’t stick to a budget, and don’t want to work with advisors to invest and manage the money, then the annuity may be your safest bet.

Tax Benefits of Charitable Trusts

For high lottery winners who want to take a lump sum, financial advisors often recommend creating a charitable remainder trust or charitable lead trust. These specialized trusts provide tax benefits when giving some of your lottery winnings to charity. They allow you to:

– Reduce your taxable income in the year you win. You get an upfront deduction for donations that will be made from the trust in future years. This helps lower your taxes due on the lump sum.

– Get assets out of your taxable estate. Amounts allocated to charity in the trust are removed from assets that could be subject to estate/inheritance tax when you pass away.

– Lock in an income stream for life. Charitable trusts can be structured to pay you income for life before distributing remaining assets to the charity upon your death.

While giving away chunks of your windfall reduces the total that is yours to spend, the tax benefits for high earners are significant. A charitable remainder trust contributed $100 million would certainly have less paid out over your lifetime than keeping the full amount. But the tax savings compared to keeping the $100 million could certainly still leave you with more total wealth in the long run.

If you ever win the lottery, consult experienced tax and financial advisors to see if a charitable trust strategy could be beneficial for your situation. Don’t just give money blindly on your own. The trusts can be complicated to establish, but structured properly are an excellent wealth management tool.

How Previous Lottery Winners Chose

Looking at how past lottery winners chose between annuities vs lump sums can provide helpful insights:

– The biggest ever jackpot of $1.586 billion went to 3 Powerball winners in 2016. All 3 took the lump sum of $327.8 million (before taxes).

– A Massachusetts woman who won a $758 million Powerball jackpot in 2017 took a lump sum of $480 million. She was 50 years old at the time.

– 20 year old Florida man who won a $451 million Mega Millions jackpot in 2018 took the lump sum. His after-tax amount was $281 million.

– A New Hampshire woman who won a $560 million Powerball prize accepted an annuity. She was 70 years old when she won, so longevity risks were less of a concern.

– A North Carolina man who won a $344 million Powerball prize in 2018 chose the lump sum. “I want the cash so I can enjoy it now” he explained. He was 66 years old.

– A 53 year old Pennsylvania man who hit a $206 million Mega Millions jackpot took the cash option. “A bird in the hand is worth two in the bush” he said about getting his money right away.

Based on these real world anecdotes, younger lottery winners tend to favor lump sums so they can spend and invest their winnings freely. Older winners are more open to annuities to lock in stable income as long as they live. But each case is unique, and some older winners still opt for lump sums too.

Pros and Cons Summary

Here is a summary of the key pros and cons to consider:

Lump Sum Pros:

– Full control over your money to spend and invest
– Potential for higher investment returns overall
– Make major purchases immediately
– Reduce risks related to lottery solvency
– Assets available for heirs if you die early
– Pay all taxes immediately and move on

Lump Sum Cons:

– Higher tax bracket all at once
– Requires budgeting skills and financial management
– Could be mismanaged, spent irresponsibly too fast
– Not guaranteed for life, risks assets running out

Annuity Pros:

– Income guaranteed for life no matter what
– Forced budgeting of payments over time
– No investment decisions or responsibilities
– Income rises to help combat inflation
– Lower taxes owed each year

Annuity Cons:

– Less lifetime income than lump sum potentially
– No control over lottery investing your money
– Lose most of prize if die prematurely
– Risks of lottery bankruptcy down the road
– Inflexible payment structure

As you can see, there are compelling reasons in support of both options. Everyone’s situation is different. Think carefully about your age, financial discipline, tax situation, and risk tolerance before making a decision.

Recommendations for Different Scenarios

Based on all the factors we’ve discussed, here are recommendations for which option may make sense in different scenarios:

If you are young – Lump Sum.

Being young means you have a long lifespan and timeline to invest. The lump sum allows you to invest aggressively for potentially higher long term returns. Early winners also have plenty of working years left to earn more money if necessary.

If you’re nearing retirement age – Annuity.

If you’re in your 60s already, it can make sense to lock in guaranteed income for the rest of your life through the annuity. You have less time left to recoup lump sum investment losses.

If you have financial self-discipline – Lump Sum.

If you’ve shown responsibility managing money and savings, the lump sum can work. Create a budget and investment plan rather than spending recklessly.

If you’ve had money problems – Annuity.

Those with tendencies to overspend, overindulge, or fall for scams should consider the forced budgeting of annual payments. Don’t trust yourself with a fortune upfront.

If you expect to live a long life – Annuity.

If you have reason to believe you’ll outlive average life expectancy, the annuity guarantees you’ll get the full amount as long as you live.

If health issues run in your family – Lump Sum.

A family history of serious conditions starting at a younger age makes the annuity more risky. You may not live long enough to recoup the full jackpot. Take the lump sum while you can.

If you have dependents – Lump Sum.

A lump sum allows you to leave assets for children, grandchildren, or other loved ones as inheritance. The annuity stops when you die, cutting off any remaining funds.

Think carefully about which choice gives you the highest likelihood of long term satisfaction based on your unique situation. The right answer differs for everyone.


Deciding between accepting the full lottery jackpot as an annuity spread over decades or taking a lump sum immediately is an important choice. There are good arguments on both sides of the issue. Factors like your age, finances, family, and risk tolerance all play a role. Tax implications also matter, especially if subject to very high tax rates taking a lump sum all at once. For large jackpots above a few hundred million dollars, setting up charitable trusts can provide significant tax advantages if you want to take the cash. Getting personalized advice from financial planners can ensure you make the best selection for your unique circumstances. While it’s an overwhelming decision, keep in mind there ultimately is no truly “wrong” choice – either option will set you up incredibly well for life. The key is making an informed decision after considering all the angles, not one based on impulse.