How Powerball winner should collect
The winner of last weekend's jackpot of nearly $600 million now has to decide whether to take a lump sum or annual payments. An expert weighs in with advice.
This post comes from Ross Kenneth Urken of partner site MainStreet.
One lucky person at a Publix supermarket in Zephyrhills, Fla., purchased the winning ticket for the highest Powerball jackpot in history, estimated at $590.5 million.
After winning with odds at 1 in 175.2 million, the person has done the hard part, but whether to take a lump-sum cash payout or to collect the winnings in annual payments is the cushy but difficult decision the lucky duck will now have to make.
Most winners go for the lump sum in order to be in control of the money from the get-go, and with fears of continued rising tax rates, it might be better to take a softer blow from the Internal Revenue Service now than a harder one in the future.
"The immense size of this particular jackpot can make things a bit more straightforward," said Doug Walker, the president of AfterLotto, a company that provides legal, financial and personal assistance to lottery winners.
Whereas a person may be reluctant to take about half of the total pot for the instant gratification of a lump sum -- the lump-sum payout here would be about $300 million -- the difference between $300 million and $600 million is more negligible at those amounts. It's a question of whether to have golden toilet seats in your yacht.
Generally speaking, the older the winner is, the better an idea it is to take the lump sum, Walker says; with fewer years to get installment payments, it's best to take the cash in one fell swoop and live the high life.
"Considering that the Powerball annuity option pays out 30 installment that grow larger every year, someone who is already near or beyond the age of retirement clearly has less incentive to take an annuitized payment structure than a younger winner," Walker said. "Similarly, age tends to make people wiser and often leads them to make more rational financial decisions and more willing to take the advice of qualified financial representatives."
The younger a person is, the more likely he or she is to be reckless with the money, and with the lump-sum payout at about $300 million, the immensity of the winnings could be difficult to manage.
"So the big question is whether someone could still get themselves into trouble by receiving all that money at once," Walker said. "And the answer is a resounding 'yes.' Winning that kind of money immediately and permanently alters lives. And until someone experiences the effects firsthand, it can be very difficult for them to truly appreciate the severity of these upcoming changes."
The more prudent decision from the standpoint of mitigating behavioral risk of splurging or blowing the money frivolously is to avoid the lump sum.
"Because of this, the annuitized option makes a lot of sense for people who could benefit from the added insurance these graduated payments provide," Walker said.
More from MainStreet.com:
I'm sure that 30 years ago, ppl thought that their social security would be safe.
What prevents the government in 10 or 20 years from passing some type of emergency act to divest a "portion" of the owed lottery monies ?
ANYONE who doesnt take the lump sum is necessarily trust this administration, and the next 6 administrations.
We live in crazy times, where Russia is becoming more capitalistic everyday, while the U.S. sinks deeper into Socialism every day.
Yeah. I trust MY money to a government bent on socialization.
Don't be a chump, best to take the lump. You get handed 300M. That in and of it self should last for ever. Interest alone at a modest 5% is 15M a year, and that can go on for ever and ever. You are not dependent on the solvency of the lotto system. You can place that money where ever you want (off shore banks, Switzeland, anywhere). You can convert it into anything you want (land, gold, stocks and bonds, 60's muscel cars, art, whatever).
The main thing is that you have control over it, not the government. I may me wrong but the interest will be taxed at the lower "capital gains rate" versus the "regular" tax rate of a yearly check. With that difference you would actually take home more off the interest.
There is no wrong answer to this, just degrees of sound money management. What a nice problem to have. But I always say take the lump.
Still not sure what to do.....how about this.
300M earning a modest 5% = 15M a year. 15M x 30 = 450m. 450M + 300M = 750M
After 30 years you would have been paid a total of 750M if you take the lump. Now assume that you live high and spend every penny you earn off interest. You would still have 300M sitting there.
I know that is a simplistic representation but I think you get the point.
Lump sum payment. If you take it pievce meal and die the payments stop and your wife/family gets nothing. If you take it in one lump sum, you pay the taxes, invest the rest and live off the investment/interest.
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