Skip to Content

Which is better lottery annuity or lump sum?

When you win the lottery, you have a big decision to make – do you take the winnings as an annuity paid out over many years, or as a lump sum payout? There are pros and cons to each approach, and the right choice depends on your specific circumstances and goals. In this comprehensive guide, we’ll walk through the key factors you need to consider when deciding between the annuity and lump sum options. We’ll look at how payments are structured, the financial implications, and what experts recommend for different types of lottery winners. With the right information, you can make an informed decision that aligns with your long-term financial wellbeing.

How lottery annuity payouts work

If you choose the annuity option, your lottery winnings will be paid out to you in periodic installments over many years. Typically, lotteries pay out over 20-30 years. Here’s how it works:

  • The full jackpot amount is invested in low-risk securities by the lottery commission.
  • Each year, a portion of the investment earnings are paid out to you before taxes.
  • Payments are fixed and determined upfront based on average long-term interest rates.
  • Deferred payments earn interest so the full amount can be paid out over time.
  • Payments continue for the set number of years, no matter how long you live.

The biggest advantage of the annuity payout is that it provides a stable source of income for decades. You won’t have to worry about managing a large lump sum or ensuring the money lasts. On the downside, you won’t have access to the full amount of money upfront.

How lump sum payouts work

Choosing the lump sum option means you get your full lottery jackpot amount paid out immediately in one payment (before taxes are taken out). With the money directly in your possession, you have complete flexibility over how to invest, spend, or save the funds.

Here are some key things to know about lump sum payouts:

  • You get immediate access to the full lottery amount.
  • Taxes are taken out right away as a lump sum instead of over time.
  • You bear all responsibility for managing the money prudently.
  • Returns rely completely on how you invest the funds.
  • The money could run out if you spend lavishly or invest recklessly.

The lump sum gives you control over your money from the start. But unless you invest and budget it wisely, the funds could be depleted quickly.

Financial considerations

To decide which option is better for your needs, it’s important to look at some key financial considerations.


Taxes make a big impact on just how much of those winnings you actually take home. With an annuity, taxes are paid annually only on the portion you receive that year. With a lump sum, all taxes are due immediately. The rate can be over 40% for a massive jackpot. That big initial tax hit can significantly reduce your lump sum amount.

Investment income potential

If you take the lump sum, you can invest the funds right away. If you earn higher returns than the fixed annuity payments, you could end up with more money in the long run. However, your investment income relies completely on market performance and your investing choices. There is no guarantee you can beat the annuity earnings.


Over decades, inflation slowly decreases the real value of money. Annity payments are fixed, so they won’t rise with inflation each year. Lump sums have the potential to achieve returns that outpace inflation and retain purchasing power. But this isn’t guaranteed either.

Cost of living

Annuities provide reliable income no matter what happens with living costs or unexpected emergencies. Your payments will keep arriving on schedule. A lump sum gives you more ability to pay for big expenses like medical bills or long-term care costs if needed.


Annuity payments continue for your full lifetime, even if you outlive the guarantee period. This ensures you won’t run out of money. With a lump sum, you need to budget carefully to have enough left later in life. If you have health issues or family history that suggests you may have a shorter lifespan, the lump sum can make more sense.

Desired lifestyle

Think about your plans for the money if you took a lump sum. Do you want to travel the world or make expensive purchases? A lump sum allows you to splurge on big luxuries immediately if desired. If you prefer to stick to your current lifestyle with little change, the annuity provides steady income for daily costs.

Recommendations by type of lottery winner

Here’s what financial experts typically recommend for different types of lottery winners:


An annuity ensures reliable fixed income for life, protecting against longevity risk. This provides peace of mind in retirement without worrying about money running out.

Working individuals

For people still earning income, the lump sum gives flexibility to invest and supplement the funds. It also allows bigger splurges like travel. But budget carefully so the funds last.

Younger individuals

Taking a lump sum early in life provides huge investing and compounding potential if managed wisely over time. This can set you up nicely for retirement.

Big jackpot winners

With jackpots over $100 million, somechoose a portion as an annuity to guarantee lifetime income, and the remainder as a lump sum for investing and spending flexibility.

Financially savvy investors

Those experienced with investing and financial planning are often better equipped to manage a large lump sum responsibly on their own over time.

Debt-ridden individuals

For those with high debts, the annuity provides reliable income to pay off debts over time. Splurging with a lump sum before paying off debts can be risky.

The best option aligns with your financial abilities, needs, and specific circumstances. Consult a fee-only financial planner for personalized guidance.

Things to do if taking the lump sum

If you opt for the lump sum, here are some smart things to do:

  • Pay off any high-interest debts first before investing.
  • Set aside an emergency fund with 6-12 months of cash.
  • Invest conservatively with a balanced, diversified portfolio.
  • Work with a reputable financial advisor you can trust.
  • Don’t rush to spend lavishly – take your time.
  • Live within your means and budget wisely.
  • Set money aside to cover future taxes.
  • Make charitable contributions thoughtfully.
  • Consider trusts or other structures to protect assets.

The most important thing is having a prudent long-term financial strategy and avoiding temptations to overspend. This gives you the best chance of making a lottery lump sum last.

Things to watch out for

Some key risks and pitfalls to be aware of include:

  • Getting pressured by friends and family asking for money.
  • Being targeted by scammers, con artists, and shady investment pitches.
  • Overspending on luxury purchases like cars, jewelry, and property.
  • Making overly speculative or foolish investments that backfire.
  • Not setting enough aside for taxes that are owed.
  • Depleting the lump too quickly without regard for the future.
  • Paying penalties or fees for early withdrawal if investing retirement accounts.

Any of these scenarios can quickly drain a lottery fortune if you aren’t careful. Stay disciplined, take your time with big decisions, and seek trusted professional advice.

Key factors in deciding

Here are some key questions to ask yourself when deciding between the annuity and lump sum:

  • How financially responsible and risk tolerant are you?
  • What are your lifetime income needs?
  • How soon would you want access to the money?
  • Are you comfortable managing investments?
  • Do you have debts that need paying off?
  • Do you have experience sticking to budgets?
  • How old are you and what is your health outlook?
  • Do you have financial dependents you want to provide for?
  • Are you willing to change your lifestyle and stay grounded?
  • How experienced are you handling large financial amounts?

Evaluate these factors honestly to gauge which option aligns better. Discuss decisions with family and any financial advisors.

Tax considerations

To understand the tax implications:

  • Annuity – Only taxed on the portion received each year at ordinary income rates.
  • Lump sum – Taxed in full at higher federal rates up to 37% and potentially state/local taxes.
  • Long-term capital gains rates can apply to lump sum amounts if invested, depending on holding periods.
  • Estate taxes may apply to any unpaid lottery installments at death.

Work closely with a tax professional to implement strategies to mitigate taxes either way.

Pros and cons comparison

Here is a comparison summary of the key pros and cons:

Lottery Annuity


  • Guaranteed stable income for life.
  • Money managed by lottery commission.
  • No big investment decisions or responsibilities.
  • Avoid risks of spending lump too quickly.
  • Payments continue even after guarantee period.
  • Taxed annually only on installment received.


  • No access to full amount upfront.
  • Inflation erodes purchasing power over time.
  • Less flexibility with funds.
  • No potential for investment gains.
  • Payments stop at death.

Lottery Lump Sum


  • Full access to funds immediately.
  • Investment earnings potential to outpace inflation.
  • Flexibility for major purchases and expenses.
  • Can leave remaining assets to heirs.
  • No long-term payment obligations.


  • Big initial tax hit.
  • Requires financial discipline and investing skill.
  • Money could run out if mismanaged.
  • No guarantees or stable income.
  • Open to scams, spending splurges, family asks.

As you can see, each option has advantages and disadvantages to weigh carefully based on your needs and situation.

Should you take the annuity or lump sum?

There is no universal right choice – it depends on your specific circumstances. Here are some guidelines:

The annuity may be better if:

  • You want simple, guaranteed income without investment duties.
  • You don’t need access to all the money immediately.
  • You tend to overspend or lack investing experience.
  • You have considerable debts to pay down over time.
  • You worry about outliving retirement savings.

The lump sum may be better if:

  • You have experience wisely managing large sums.
  • You seek flexibility and want funds immediately.
  • You have a shorter life expectancy.
  • You have significant one-time expenses.
  • You have estate plans requiring accessible assets.

Most importantly, meet with qualified financial and tax advisors to assess your full picture before deciding. Either option can be suitable depending on your circumstances and preparation.


Choosing between a lottery annuity and lump sum is a very personal big decision that can impact your finances for life. Consider your income needs, tax implications, investing abilities, time horizon, and goals to determine which aligns best strategically. With proper planning, advice, and discipline, either approach can provide long-term financial stability and peace of mind as a lottery winner. Carefully weigh the pros and cons and seek expert counsel to make the most prudent choice fitting your situation.