what’s the difference between the annuity and cash value option in the lottery? Which is better and why?
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Annuity pays over the lifetime of the lotto period.
For example, they’ll say the lottery is worth $100 million. That means that, in 20 years, it’ll be worth $100 million, although it might only be $50 million right now, so they’ll invest it in treasuries or something safe so it’ll be “worth” $100 million in today’s dollars in 20 years.
You then get a check every year for a fraction of that so *in total* you’ll get $100 million in checks over 20 years.
The cash option is the value it actually is, $50 million. So they cut you a check for that, and it’s up to you to invest it to make the $100 million advertised, even though that’s only an annuity option thing.
Most people take the cash option. It’s pretty rare that someone takes the annuity option, as you can invest and make far more than the annuity option. Or you want all that money at once.
To get the elephant in the room addressed at the outset:
There is only one pot of money at play, and it’s the lump sum option. If you select the lump sum, that’s what you get.
If you opt for the annuity, what happens is that the lottery agency takes that lump sum, invests it, and starts paying you the proceeds of the investment according to the annuity schedule. Usually, it’s structured so that each payment is so many percent larger than the last one.
There are a couple considerations at play when you ask which one’s “better,” and there’s not really a single answer. The lump sum means you get the money right then and there, and you don’t have to wonder if the agency will still exist, or what happens if it doesn’t.
You also get all of your tax obligation out of the way up front, as opposed to paying every year. If tax rates go up, you’ll end up having paid more tax at the end.
There’s also the financial literacy and responsibility angles; if you get it all at once, nothing’s stopping you from blowing it and being broke in a few years. With the annuity, you’re protected from yourself.
Annuity pays you a certain amount of money every year (or month or week or whatever) for a certain number of years. When they say the Jackpot was $100 million, that means the annuity was worth $100 million–like $5 million per year for 20 years.
The cash value is what is also called the lump sum payout. This means they give you a one-time LARGE payment. It is often only 50-60% of the advertised Jackpot balance. For example the recent $1.34 billion dollar jackpot payed out a lump sum of about $780 million. Still a lot of money, but a lot less than the $1.34 billion advertised. You’ll also likely have to pay another 50% of that in taxes so for a $1.34 billion lottery win, you’ll take home “only” around $400 million.
Many lottery players would be better off with the annuity since many of them have poor money management skills (they’re wasting money on the lottery after all), but most seem to choose the lump sum payment. About 70% of lottery winners spend all of their winnings in under 5 years. With the annuity they would still have 15 or so more years of a good income.
If you are good with money management, then a lump sum payout is likely the best option. In you invested that $780 million lump sum win over 20 years with a meager 4% return, you’d have about $1.7 billion dollars. The S&P500 has a 7% inflation and dividend adjusted average return over a 20 year period–this would net you about $3 billion after 20 years.
If I win I want to set up a LLC in my ex wife’s full name and have my attorney claim it. She’d enjoy the publicity for the first 15 minutes.
The annuity pays over 30 years, and the total gave value of the payments is about twice the lump sum option. Assuming you know how to manage your money, the annuity is a pretty low return on your investment- which it should be, because it is basically risk free returns.
I think the key thing is, with the lump sum you take the tax hit up front, which isn’t a bad idea based on how current tax rates compare to rates over the last 50 years.
If you take the annuity, you may be able to set things up to about state income taxes, but I assume the various states don’t make that easy
Others have noted that taking the annuity protects you against your own stupidity, because you can’t spend it all right away.
Another factor in deciding which is best for you is your life expectancy.
If you win it at 60+ years old, it pretty much doesn’t make sense to do anything but “lump sum” and get a good financial manager.
You get half up front if you take cash option. If you are smart and get a ‘wealth management’ they will invest the money and you live off the proceeds. In 20-25-30 years when the annunity would have run out, you should still have your capitol, your wealth and be able to leave it to your next generation, your cat, or fund some charity.
The annunity pays you 4% of the value of the winnings, for 25 years. at the end of that time, its gone.
from what I understand, a good financial management is supposed to return on average 8% the historical return on stocks is 11%
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