If someone won the lottery, why wouldn't they do the lump sum option? (IRA, buy)

[Trishim]

I get you don't get the entire amount for various reasons, but it's still a lot especially at the higher levels.

[artillery77]

You get less if you take the lump sum, and pay more in taxes assuming tax rates are steady.

[reed303]

The decision can be influenced by the winner's age. An older person might take the lump sum, where a young person might take the annuity.

I think there was a recent Mega-Millions won by an 18 y/o who bought a ticket on their birthday, and opted for the annuity.

BTW, historically a lot of annuity winners later "sold" their annuity for a lump.

[MLSFan]

Originally Posted by artillery77

You get less if you take the lump sum, and pay more in taxes assuming tax rates are steady.

how is it less? the annuity grows at about the same rate as you investing it

take the lump sum now and pay into the highest tax bracket then pay long term cap gains from then on

or pay into the highest tax bracket for the next 30 years... mathmetically it is all the same but you have less control over it

maybe if someone lived in a high state income state? they take the annuity so they can move states then buy it out then?

[City Guy997S]

Only reason to take the payments (annuity) vs. the lump sum is if you are bad at money management or you don't want the hassle.

The annuities are invested in US bonds (safe as long as the govt doesn't go broke, guaranteed low rate of return). Recently they changed the payouts to start with a smaller payments and a 5% cost of living increase every year for the next 29 years.

Things that can go horribly wrong if you take the cash:
1. Overspending
2. Poor investment choices yield lower returns (possibly negative returns) than the annuity
3. Overload on investments/advice (too many choices, too many people looking to help....and help themselves to commissions). Managing millions is a stressful, full time job!

[City Guy997S]

Originally Posted by reed303

The decision can be influenced by the winner's age. An older person might take the lump sum, where a young person might take the annuity.

I think there was a recent Mega-Millions won by an 18 y/o who bought a ticket on their birthday, and opted for the annuity.

BTW, historically a lot of annuity winners later "sold" their annuity for a lump.

The last big Mega winner was 20 and he took the lump sum:


TALLAHASSEE — About 1 a.m. Thursday, 20-year-old Shane Missler wrote on Twitter: "The power of positive thinking should not be underestimated!"

By that time he already knew he had won the lottery.

And not just any jackpot, but $451 million.

Missler bought five quick-pick Mega Millions tickets last week at a 7-Eleven store in Port Richey, where his family lives. One was the sole winner of the fourth-largest Mega Millions jackpot of all time, lottery officials said. Missler, grinning widely and clutching a yellow envelope, turned it in Friday shortly after noon at the Florida Lottery headquarters in Tallahassee.

He was with his dad and a lawyer, who released a statement on his behalf:

"If there is one thing I have learned thus far in my short time on this earth it is that those who maintain a positive mindset and stay true to themselves get rewarded," Missler said. "I look forward to the future."

Missler — not even old enough to celebrate his winnings with a drink — opted to take the lump-sum payment of $281,874,999. The Florida Lottery withholds federal income taxes at a rate of 25 percent, officials said, dropping the amount to $211,406,249.25.


.....note the top tax rate is 37% so the kid owes 12% more in taxes than they withheld.

[MinivanDriver]

There's no way I'd take an annuity.

First, if I died, the inheritance taxes on the total of the lottery winnings would immediately come due to my heirs. There have been cases of this.

Second, especially when you look at a state such as Illinois delaying payments on lottery payouts, I wouldn't trust the government in the future to make its payment to me.

Third, I'd rather have the lump sum just in case I decided to ever leave the country.

[Lowexpectations]

Originally Posted by artillery77

You get less if you take the lump sum, and pay more in taxes assuming tax rates are steady.

This ignores the time value of money

[MrGompers]

The size of the jackpot would influence my decision. In CT we have these "win for life" scratch ticket games with different jackpots. Starts with 2k a month for life, then 5k - 7.5k - 10k. I think the 2k per month ticket is $1 then it goes up to $10 per ticket.

If we use the lowest jackpot as example, 2k for life monthly, the cash option is 360k, but one would receive at least 360k in 15 years. 360,000 / 24,000 = 15

If a winner is 20 years old and lives to 80 years old they would collect $1.44 million over that time.

None of these examples account for taxes or inflation, but if a person was good at budgeting / managing money they could put approx 18k of the yearly 24k into an IRA and pay no taxes until they withdraw the money. Not many people can think that far in advance though.

[Nov3]

One word: Taxes!

Seriously states are increasing their 'catch' of profits by taking more each year little by little . What may be a 6% one year will be 9-12% by year 12 of the annuity. The feds get upfront and be done. Not so true for states.
Take YOUR money and run. Get your necessities and be done with 'investing' or giving YOUR money to corps in the stocks. They'll tax your profits...so why even go there.