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 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.
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