Powerball jackpot rises to $1.7 billion before Christmas Eve
The New York Lottery announced today that one winning ticket for the top prize in the December 21st TAKE 5 EVENING drawing has been sold.
Fox – 5 New York
A 20-year-old Canadian woman recently set social media on fire after winning the lottery and (gasp!) choosing to receive her winnings in an annuity rather than a lump sum.
Instead of receiving a tax-free lump sum of $1 million (Canadian lottery winners are not taxed like U.S. jackpots), Quebec’s Brenda Aubin-Vega opted to receive $1,000 weekly for life. Her decision contrasted with what the majority of lottery winners choose and drew criticism. Everyone seemed to have an opinion, including Binance founder Changpeng Zhao.
The heated debate once again highlights the long-standing question of whether lottery winners should receive a lump sum or an annuity, and how that decision is made.
“The reason most people take a lump sum is because they think if they take their pension and get hit by a bus, it’s over,” said Dan White, founder and CEO of Daniel A. White & Associates in Glen Mills, Pennsylvania.
What is a lump sum and what is an annuity?
Before deciding how to claim their prize, winners should understand what their two options are.
- lump sum A one-time cash payment, usually the cash value of the jackpot. The cash value is the amount required in the jackpot prize pool on the date of the drawing to fund the estimated jackpot annuity prize.
- pension Payments made at regular intervals over a set number of years or a lifetime. The two major U.S. lotteries, Mega Millions and Powerball, pay annuities that increase by 5% each year for 30 years.
Indeed, if the winner was hit by a bus, the winner might only have enjoyed a portion of the prize money. However, the winner can leave any unpaid pension to his or her heirs.
If the winner or heirs wish to receive a lump sum instead of an annuity, they can sell the remaining annuity payments at any time.
What do most lottery winners choose?
A 2011 study examining the Powerball lottery from 2003 to 2009 showed that more than 93% of jackpot winners received a lump sum payment.
Is a lump sum payment the best option?
Many people on social media believe that a lump sum is always better because you can invest and grow your money faster than an annuity. After all, the average annual return for all S&P 500 stocks, including dividends, is about 10%.
“She better receive $1 million today,” Binance’s Chao wrote in a social media post. But instead of stocks, he suggested, you should invest that money in Bitcoin and eventually end up with “$1,000 every week for the rest of your life and millions of dollars left over.”
But that strategy could be riskier than automatically increasing lottery pension payments each year, some advisers say. The stock market can post losses for multiple years at once.
Don’t forget about the curse of the lottery. “How many lottery winners have gone bankrupt over a five-year period because of bad investments, gambling, drug purchases, car purchases, etc.?” White said.
The American Bankruptcy Institute (ABI), a nonprofit research group, said winners are more likely than the average person to declare bankruptcy within three to five years after their big win. It is generally estimated that the percentage of lottery winners who end up declaring bankruptcy is as high as 70%, with a more conservative estimate of about 33%.
“In either case, a significant number of lottery winners will end up in bankruptcy court,” ABI said.
Is a pension the best choice?
Researchers in a 2011 report argued that the main reason for the double taxation posed by lump sum payments in the United States is that choosing an annuity is usually more financially advantageous.
“Significant taxes are paid upfront on the entire lump sum, and subsequent investment returns are taxed in the same way as pensions,” it said. Additionally, annuitants “receive higher present value payments over the life of the annuity than those receiving a lump sum.”
Assuming a life expectancy of 85 years, 20-year-old Aubin Vega would receive a lump sum payment of $1 million, totaling more than $3.3 million. Figures are not adjusted.
Experts say choosing an annuity can also deter scammers.
Winners “should choose to pay in installments rather than in a lump sum and… should remain out of the public eye to avoid potential fraudsters, thieves, users and opportunists,” ABI said. He also said they should continue working. “This maintains a sense of normalcy, makes it less obvious, and gives winners less free time to spend their money.”
So what’s right and what’s wrong?
Ultimately, the choice is personal, the advisers said.
Consider the following when making your decision:
- health and age“If you’re 65 years old and making $52,000 a year, it will take you about 20 years to reach $1 million,” White says. “Maybe you should take the lump sum.”
Winners would then be able to spend and distribute their money as they see fit while they are still alive, rather than waiting until after they die for distributions to be made.
- Risk tolerance and goals: How comfortable are you with investing and potentially losing money and receiving a guaranteed income?
- what type of person are you: Are you a spendthrift or financially disciplined?
“Winning the jackpot is exhilarating, but smart financial planning can make all the difference between fleeting thrills and long-term security,” said Lauren Wyver, senior wealth executive at Vanguard.
“Before you make any big decisions, think through your short- and long-term goals and hire a trusted advisor to help you develop a plan to maximize your winnings.”
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
