what’s the difference between the annuity and cash value option in the lottery? Which is better and why?
In: 12
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.
Latest Answers