Winning the lottery is an exhilarating experience, but it also comes with some big decisions to make. One of the most important choices you’ll have to make as a lottery winner is whether to take the winnings as a lump sum cash option or as annual payments over many years.
Should I take the cash option or annual payments?
There are pros and cons to both the cash option and annual payments. Here are some of the key factors to consider:
Taxes
With the cash option, you will owe taxes on your full prize amount in the year you win. This could bump you into a higher tax bracket and mean owing a significant chunk to the IRS and state. With annual payments, you are only taxed on each installment as you receive it, which may keep you in a lower bracket each year.
Investment opportunities
Taking the lump sum allows you to invest the full amount right away. If you earn a higher rate of return on investments than the annual payment increment, you could end up with more money in the long run by taking the cash upfront. However, that does involve more investment risk and requires financial savvy.
Risk of overspending
Coming into a massive windfall all at once can overwhelm some lottery winners. Without restraint, the cash option provides ample opportunity to overspend on luxury purchases, gifts to family and friends, or unwise investments. The discipline imposed by annual payments helps prevent blowing through your fortune too fast.
Payment flexibility
Opting for annual payments gives you a steady income stream for decades, which many find comforting. But it also limits your financial flexibility. With the lump sum, you have the freedom to change how and when you use the money at will.
Life changes
If you take annual payments, considerations like marriage, divorce, job changes or moving to another state can complicate your finances and tax situation down the road. With the lump sum, you don’t have to worry about changes in circumstances over time affecting your winnings.
Interest rates
Annuity payments are invested conservatively by state lottery commissions, generally earning interest around 1-2% these days. If you think you can earn a higher return on the lump sum yourself, the cash option makes more sense financially. But if rates are low, guaranteed annuity payments may be preferable.
Creditor protection
While state laws vary, annual payments are generally protected from creditors and civil lawsuits. If you take the lump sum and then face problems like bankruptcy, lawsuits, or divorce, the cash could be at risk. Annuity payments provide a shield against such financial claims.
Estate planning
With annual payments, any remaining installments after your death go into your estate for your heirs. This provides an income stream for beneficiaries long into the future. With the lump sum, you’d need to plan carefully to ensure there are adequate funds left for family after you pass away.
Tax implications
Taxes make a big difference in deciding between the cash and annuity options. Here are some key tax considerations:
Federal taxes
Both lump sum and annual payments are taxed as ordinary income at your federal tax rate. The difference is timing – either all at once or spread out over many years. This affects your tax bracket and impacts how much of your prize is kept versus paid in taxes.
State taxes
Most states also tax lottery winnings. Some exempt annual payments, others don’t. Be sure to check your own state’s rules. Where you live and where you purchased the ticket can affect state tax liability.
Future tax rates
No one knows if tax rates will change in the future. But if tax brackets increase down the road, annual payments could end up being taxed at a higher overall rate over 30 years than the lump sum is taxed at today’s rates.
Tax planning strategies
Consult a tax advisor about strategies to minimize taxes on your prize. If taking the lump sum, strategies like gifting to heirs or donating to charity in the first year can reduce taxable income. There are also tax-advantaged retirement plans and investments to consider.
Withholdings
For either option, the lottery is required to withhold federal taxes at a flat 24% rate initially. You may owe more or less when you file – withholdings just reduce the amount you need to pay in by April 15. State withholdings vary.
Financial planner vs managing the money yourself
Coming into a windfall like winning the lottery presents a significant financial planning challenge. Here are some pros and cons of enlisting professional help versus managing the money yourself:
Hiring a financial planner
Pros:
- Expertise investing large sums and high net worth portfolios
- Objective insight into your full financial picture
- Help avoiding common lottery winner mistakes
- Tax planning guidance to reduce tax liability
- Ongoing support sticking to your financial plan long-term
Cons:
- High fees can eat into your winnings significantly over time
- May not beat the market or provide promised returns
- Still doesn’t guarantee wise financial decisions in the end
Managing the money yourself
Pros:
- Avoid paying expensive professional fees
- Retain full control over how winnings are used and invested
- Opportunity to learn about personal finance and investing yourself
Cons:
- Lottery winners are prime targets for scams and bad investment pitches
- Lack of experience investing and managing large sums of money
- Emotional attachment to money can cloud judgment
- Susceptible to overspending without detached professional guidance
Many financial planners recommend a balanced approach – work with an advisory team to plan investments and budgeting, but maintain control over how your money is ultimately used.
Picking the right financial advisor
If you do decide to work with a financial planner or advisor, here are some tips for finding the right fit:
- Look for fee-only advisors who don’t earn commissions for specific products
- Ask about their experience working with lottery winners specifically
- Understand how they are paid and what incentives are built into that fee structure
- Interview multiple advisors before deciding who to trust
- Ask for referrals from other lottery winners who were happy with their advisor
- Check for disciplinary history on the SEC’s Investment Advisor Public Disclosure site
- Choose an advisor you connect with – you’ll be working closely for years to come
Avoid advisors who pressure you to act quickly or make promises that seem too good to be true. Take your time vetting and choosing the right advisor.
What to do first if you win the lottery
Before you make any big decisions about whether to take the cash or annual payments, here are some key steps to take first:
- Sign the back of your winning ticket and keep it somewhere very safe. Make copies.
- Work with attorneys and financial planners to set up trusts and entities to claim winnings anonymously if your lottery allows.
- Assemble a team of experienced legal, tax and financial advisors to help strategize.
- Decide whether to do traditional press conferences and publicity or remain anonymous.
- Pay off any existing debts you may have.
- Set aside funds to pay any taxes owed.
- Make plans to continue working or not.
- Take your time exploring options before deciding on cash or installments.
Resist making any big lifestyle purchases or investments in the initial rush of a lottery win. Focus first on smart legal and financial planning.
Horror stories of lottery winners who went broke
It’s estimated that around one third of lottery winners eventually go bankrupt. Some high-profile cases of lottery disasters include:
Jack Whittaker – $315 million
West Virginia winner Whittaker had a long downward spiral after winning what was then the largest single-ticket Powerball jackpot. Within just a few years, he had been sued over bounced checks, had hundreds of thousands stolen by thieves, spent time in jail, and lost his granddaughter to a drug overdose.
William “Bud” Post III – $16.2 million
Post won the Pennsylvania lottery in 1988, but ended up $1 million in debt within a year. After his brother hired a contract killer to try and murder him, he declared bankruptcy. When he died in 2006, he was living on a meager $450 monthly disability check.
Janite Lee – $18 million
Lee won the Illinois Lottery and promptly spent her millions on luxuries like mansions, art, political donations, and charity. Just eight years later, her legal troubles and debt forced her to file for bankruptcy.
Gerald Muswagon – $10 million
Muswagon won the Canadian lottery in 1998 and bought cars, partied, and gave cash away like water to friends and family. He committed suicide just seven years later, having blown through his fortune.
Success stories of lottery winners who managed money wisely
While lottery disaster stories get a lot of media attention, there are also positive cases of past winners remaining prudent and generous with their wealth:
Tom Crist – $40 million
When Crist hit the Washington Lottery jackpot in 2013, he implemented a 30-year investment plan rather than taking the lump sum. He also set up charitable trust funds as part of his financial strategy.
Richard Lustig – $1 million
Lustig won an incredible 7 lottery jackpots between 1993 and 2010. He took an incremental approach to his winnings, saving and investing the bulk, donating some, and using a small percentage for indulgences.
Brad Duke – $220 million
Duke reportedly did “paranoid” levels of research before claiming his 2005 Powerball prize, determined not to end up broke. His diligent financial strategy seems to have worked, as news reports well over a decade later show him still living comfortably.
Roy and Maureen Bayot – $448 million
The Bayots won half a $896 million jackpot in 2019 and appeared on TV tearfully discussing their commitment to philanthropic giving over extravagant spending. They plan to donate the bulk of their windfall to charity.
Top tips for managing lottery winnings
Based on financial advice and real world examples, here are some top tips for managing your money wisely if you hit a jackpot:
- Immediately assemble trusted legal and financial advisors.
- Plan for max taxes – don’t underestimate how much goes to the IRS and state.
- Invest conservatively – you already won the lottery, don’t chase unnecessary risk.
- Set up blind trusts and entities to claim winnings anonymously.
- Live below your means – don’t feel you need to spend it all.
- Make an estate plan to responsibly pass remaining funds to heirs.
- Give back – donate judiciously to causes important to you.
- Only help others after taking care of your own finances.
- Avoid letting emotions drive financial decisions.
- Be patient and think long-term – the money should last decades.
Frequently asked questions
Here are answers to some common questions about lottery cash options and payments:
What percentage of lottery winners take the annuity?
Estimates suggest around half of lottery winners take the annuity payments, while the other half opt for the upfront cash option. High published jackpots often drive more people to take the immediate cash.
Can you change your choice after claiming winnings?
In most cases, your lump sum or annuity election is locked in once lottery officials process your claim. It’s crucial to take your time and get professional advice before formally claiming your prize.
What happens if you die before all annuity payments?
Every state handles this differently. Generally any remaining payments go into your estate to be distributed to your heirs. Some states allow winners to purchase insurance policies to guarantee payments for the full term.
How quickly do you get the cash option payment?
It typically takes 2-4 weeks from the claim date to receive your lump sum payment. The lottery has to vet the ticket and process the elected payment option. The precise timeline varies by state.
Can you remain anonymous with lump sum or annuity?
Whether you can stay anonymous depends on the laws in your home state, not the payment choice. Some states allow anonymity, some don’t. You may be able to claim through trusts or other entities for privacy.
Conclusion
There’s no definitively “right” choice between taking the cash option or annuity payments. The decision depends on your specific circumstances, tax considerations, and careful financial planning. Many experts suggest a balanced approach – taking some cash upfront to cover immediate needs and investing conservatively, while putting the bulk into guaranteed annuity payments to protect your long-term fortune. Regardless of your decision, assembling experienced legal and financial advisors early is crucial. With the right team and restraint against overspending, you can enjoy your lottery winnings for years to come.