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Should you take the lump sum of Powerball?

The Powerball lottery is one of the biggest and most popular lottery games in the United States. When a person wins the Powerball jackpot, they have a choice between receiving the full jackpot amount spread out over 30 annual payments, or taking a reduced lump sum upfront. This leads many lottery winners to face the question – should I take the lump sum or the annuity payments? There are pros and cons to both options that need to be considered carefully.

What is Powerball and how does it work?

Powerball is a multi-state lottery game operated by the Multi-State Lottery Association. It is played in 45 states, as well as Washington DC, Puerto Rico and the US Virgin Islands. To play, players select five white ball numbers between 1-69, and one red Powerball number between 1-26. There are nine prize tiers, ranging from $4 for matching just the Powerball to the jackpot for matching all six numbers.

The minimum jackpot amount is $40 million, which grows based on ticket sales and rolls over if no one wins. Once the jackpot is won, the next jackpot resets to the minimum $40 million amount and starts growing again. Jackpots have exceeded record amounts such as $1.6 billion previously.

How are Powerball prizes paid out?

For lower tier prizes between $4-$1 million, players receive a one-time, lump sum payment. However, for the huge jackpot prizes the player has a choice:

– Annuitized Jackpot Prize – The full jackpot amount is divided into 30 graduated annual payments. Each payment is 5% larger than the previous one to help account for inflation. The first payment is made immediately, followed by 29 annual payments invested in government securities.

– Lump Sum Jackpot Prize – A single lump sum amount equal to all the cash in the jackpot prize pool. This is estimated as 30% of the annuitized jackpot amount. Taxes are immediately deducted from the lump sum.

The official Powerball site provides an example: if the jackpot is $300 million and taken as an annuity, it would pay out $10 million immediately and then increase by 5% each year for 29 more payments. The cash value would be around $90 million after taxes.

Should you take the lump sum or annuity?

Deciding between receiving a lump sum or annuity payments depends on your goals, financial situation, and risk tolerance. Here are key factors to consider:


Lump sum payments have much higher taxes, whereas the annuity spreads taxes over 30 years. Assuming a 37% federal tax rate and no state taxes for either option:

– Lump sum: A $300 million jackpot would have $111 million withheld for federal taxes immediately, leaving $189 million.

– Annuity: Each of the 30 payments are taxed only when received, so a winner would net $6.3 million annually accounting for 37% federal tax.


The lump sum payment provides full control and flexibility to use the money however you want. You can invest or spend it immediately. The annuity limits how much money you have access to each year for 30 years.

Potential Returns

If invested wisely, the lump sum could grow significantly more than the annuity payments. Investing in stocks and bonds could yield higher long-term gains. However, the annuity provides a guaranteed, fixed return of 5% annual increases. So the annuity provides stable, predictable returns without investment risk or effort.

Life Circumstances

Winners should consider their current age, health, and family situation. Older winners may favor annuities to match retirement needs, while young winners may want to invest a lump sum. The annuity ends if you pass away, so lump sums may be preferred if you have dependents to provide for.

State Laws

Some states allow lottery winners to remain anonymous if they take a lump sum payment, but require publicity if you win with an annuity. Lump sums provide more privacy.

Scams and Fraud

Lump sum winners are often targeted for scams, fraud, lawsuits, and requests for money from others. Smaller annual annuity payments decrease risk and bring less attention.

Self Control

Research shows that lump sums are more likely to be mismanaged or spent too quickly. The discipline of annuity payments helps prevent reckless spending and overindulgence.

Probability of winning

The odds of winning the Powerball jackpot are extremely low – 1 in 292 million. You have better odds of becoming a movie star or professional athlete. Here is a table comparing probabilities of different events:

Event Probability
Winning Powerball Jackpot 1 in 292,201,338
Getting struck by lightning in your lifetime 1 in 15,300
Becoming a pro basketball player 1 in 30,000
Dating a millionaire 1 in 215

As you can see, your odds of winning the jackpot are extremely small. So the choice between lump sum and annuity is likely a theoretical exercise for nearly all players. However, for the very few who do get lucky, the decision requires careful analysis of all the factors.

Investment options for lump sum

If taking the lump sum, the key question becomes how to invest the money. Here are some common options to consider:

Robo advisors

Robo advisor investment platforms like Betterment, Wealthfront, and Ellevest provide algorithm-based portfolio management. You simply deposit the funds and the robo advisor will automatically invest them across diverse asset classes like stocks, bonds, real estate based on your risk profile. Robos charge relatively low annual fees around 0.25%.

Financial advisors

A human financial advisor can provide personalized advice and actively manage investments based on your needs. They can help create a withdrawal strategy to sustain your lifestyle while still growing the lump sum over your lifetime. Fees vary greatly, but 1% of assets under management per year is typical. Financial advisors may have high required account minimums though, so robo advisors may be better for smaller lump sums.

Index funds

Passively managed index funds like those from Vanguard invest money across the entire stock market or bond market. They provide broad diversification and rock-bottom fees, with no active stock picking. Index funds perform well long-term, but do carry risk of market swings.

Exchange Traded Funds (ETFs)

ETFs function like index funds, but trade on exchanges throughout the day like stocks. ETFs cover every asset class from US stocks to gold. Investing broadly across ETFs provides cheap diversification. Certain ETFs even provide dividend income.

Individual stocks and bonds

Stocks provide potential growth, bonds provide fixed income. Purchasing individual stocks and bonds allows you to tailor your asset allocation, but requires research and continuous monitoring. This may appeal to more sophisticated investors who enjoy stock picking.

Real estate

Real estate investment trusts (REITs) provide exposure to real estate without having to buy, manage, and maintain properties directly. Non-traded REITs take large upfront investments but offer higher returns than traded REITs. Overall, real estate helps diversify beyond just stocks and bonds.

Other alternatives

Other alternative investments include private equity, venture capital funds, hedge funds, commodities, precious metals like gold and silver, artwork, wine and whiskey collections. These tend to be higher risk but offer further diversification. Many alternative assets have high investment minimums.

Getting financial advice

Given the complex financial decisions involved in choosing between an annuity and lump sum, it is wise for lottery winners to seek advice from professionals:

– Lawyer – Review the lottery paperwork and laws regarding payouts, taxes, and publicity/confidentiality based on your state of residence.

– Tax advisor – Analyze the tax implications to help maximize how much you keep after federal and state taxes for both options. Proper tax planning is crucial.

– Financial planner – Review your overall financial health and future goals. They can run projections to model out the best payout structure.

– Investment advisor – If investing the lump sum, an advisor can recommend how to best invest the funds to align with your risk appetite and financial objectives.

– Insurance provider – Review current insurance policies and the need for supplemental coverage given your change in net worth. Address protecting your assets.

Although these professionals will charge fees, their expertise offers great value by helping you make informed, strategic decisions about managing your lottery winnings.

Budgeting wisely

Coming into life-changing money all at once can overwhelm people and lead to uncontrolled spending. To adjust wisely, experts recommend:

– Live below your means – Don’t increase your lifestyle and spending just because you can. Stay grounded.

– Pay off debts – Eliminate credit card, auto, and mortgage debt to clean up your financial foundation.

– Split into buckets – Allocate lump sums into clear sub-accounts for spending, investing, charitable causes, etc.

– Follow the 4% rule – Withdraw 4% of your lump sum annually and adjust withdrawals for inflation each year. This historically sustains prize money for decades.

– Build up cash reserves – Keep 1-2 years of living expenses in cash as an emergency fund. Don’t invest your entire lump sum.

– Seek purpose – Having ample free time and money provides the opportunity to re-evaluate your life’s goals and purpose.

Beware of risks

While winning the lottery may seem like a dream come true, studies show big lottery winners are prone to problems like bankruptcy, anxiety, gambling addictions, lawsuits, isolation, and more. Without caution, a windfall can quickly become a nightmare. Those coming into sudden money should watch for:

– Living beyond means and overspending – Buying extravagant houses, cars, vacations, gifts depletes winnings quickly.

– Not paying all taxes upfront – Failing to set aside enough for tax withholdings leads to penalties later.

– Bad investments – Seeking hot tips, being too aggressive, or letting emotions drive decisions destroys capital.

– Scams and fraud – Record winnings attract con artists and scammers seeking to cash in through deceit.

– Lawsuits and requests – Former friends and strangers may ask for money or unjustly sue you if rejected.

– Family conflict – Money divides relatives. Setting boundaries is important.

– Isolation and purposelessness – The influx of money disrupts relationships and careers. Depression follows.

– Addictions – Drugs, alcohol, shopping, gambling addictions rise given excess free time and cash.

Staying centered, living below your means, staying close with those you trust, and seeking professional help can mitigate these risks.

Statistics on lump sum vs. annuity

Studies find that the majority of lottery winners opt for the lump sum payment, even though it is a smaller amount of money:

– Approximately 70% of lottery winners take the lump-sum option.

– The average lump sum payout is between 30-60% of the advertised jackpot. Taxes immediately deducted bring the amount down further.

– Only 10-20% of lottery winners choose the annuity. These tend to be older, retired winners who favor the annual payments aligned to needs.

– Regardless of the payment type, statistics show that 1/3 of lottery winners declare bankruptcy within 5 years of winning. Squandering winnings is common.

– Lottery winners who keep working and invest their winnings conservatively tend to retain the most money over decades. They focus on long-term discipline.

While lump sums provide more flexibility and potential investment upside, they also require great discipline to manage properly. Lean more towards annuities if you lack experience handling large sums.

Tax implications

Taxes make a significant difference in the amount of money you actually get to keep from Powerball winnings. Let’s compare taxes on a $300 million jackpot for lump sum vs. annuity (assuming the winner is a single filer residing in California):

Lump sum taxes

– Federal tax: $111 million withheld (37% rate).
– California state tax: $15 million withheld (8% rate).
– Total withholdings: $126 million
– Amount received after withholdings: $174 million

Additional federal and state taxes are due at filing time. Paying top tax rates, total take-home is approximately $125 million.

Annuity taxes

– Each installment payment is taxed as ordinary income.
– Assuming 37% federal, 8% state, and current rates stay constant:
– Annual pre-tax annuity payment: $10 million
– After federal tax (37%): $6.3 million
– After state tax (8%): $5.8 million
– Total received after 30 years: $174 million

Because only the portion of each payment you receive is taxed annually, total take home is the same as the lump sum. However, the annuity avoids a huge tax bill upfront.


Determining whether to take a Powerball jackpot as a lump sum or annuity is a complex decision requiring thorough analysis:

– Weigh priorities like flexibility, investment returns, and risk tolerance. Do you want to invest and grow the money aggressively or receive a fixed, conservative return?

– Seek input from financial and legal experts. But make sure to protect your identity first before claiming.

– Build a strong foundation before spending extensively – pay off debts, optimize taxes, set budgets.

– Invest lump sums wisely across diverse asset classes. Seek professional investment management if inexperienced.

– Live below your means, find purpose, stay connected to family and friends.

– Annuitized payments help prevent overindulgence and squandering winnings, but provide less flexibility.

– Focus on long-term discipline and prudent financial management of any windfall amount.

With the right preparations and guidance, Powerball winnings can provide lasting benefits beyond the initial excitement. Approach with caution – an influx of cash tends to amplify both good and bad behavior. Think through all options carefully and do not let the money define who you are.