If You Win the Lottery, Take the Lump Sum

Here's some advice from Bankrate that says to take the lump sum payout if you win the lottery. The details:

The lump sum payout is, for most winners, the best choice. You know the tax consequences, you know the lump sum payout and you often have the opportunity to invest the proceeds to earn more than you could with the guaranteed return from the annuity payments.

But doesn't this aggravate the problem of people blowing their money in a year or two? If you take the payments, at least you know you CAN'T lose it all since you can't get at it all.

The piece also includes this bit of earth-shattering advice:

Playing the lottery isn't a substitute for sound financial planning.

I had to smile when I read that. But then again, some people actually think this is a good way to accumulate wealth:

A 2006 survey, jointly sponsored by the Financial Planning Association, or FPA, and the Consumer Federation of America, or CFA, found that about 21 percent of Americans believe that winning the lottery is the best way to accumulate several hundred thousand dollars. That number jumps to 38 percent of people with an annual income less than $25,000.

Oh my. I'm not sure where to start commenting on this one. I guess I'll just let it speak for itself.

But here are my questions for you all:

If you won the lottery (let's say $10 million), how would you take it (lump sum or in payments.) And what would you do with the money (save it, pay off debt, splurge?)

Isn't it fun to dream? ;-)

Comments

[Traciatim]

The first thing I would do, since I'm Canadian and there are no tax implications, would be to move all the funds to my ING account. The transfer will take 5 days to clear and 2 days to get back to my main account. This will allow me the time to get grounded and come up with my real plan.

My real plan would be to dress in some non-business clothes, like shorts and a t-shirt, and walk in to a few of the top money management firms and just ask to speak to someone. I want to tell them that I want to invest for tax efficient income and they are at their discretion how to use the funds. I would then do the same thing to 10 of the top Canadian investment firms. I live off the income for a few years and after one, three, five, and ten years I drop the two firms that I like the least. This leaves me with 2 firms (to keep each other honest) that are making me money one my money and I move somewhere with good weather.

I would love to see a review of how the firms treat normal looking people and who makes the best returns when asked just to make money with no real specific restrictions.

[Chris]

I would take the lump sum, drop it into some safe investments, and take out the earnings to add to my income.

Well, if it was 10 million and say after taxes I got 5 million, that would still be around 400k a year. I could live on 100k, save 100k (which itself would begin making money) donate 100k to charity, and use 100k to run some nonprofit assistance program every year for the rest of my life. Say I retire in 30 years, I can then take that 5 million and give it to charity and retire in total luxury with the 12 million that my 100k/yr savings accumulated. Living off the interest of the interest of my winnings. Heck, with my day job for those 30 years I can just invest all that income and buy a private jet when I retire.

[Susan]

Aaaaahhhh....all of my troubles ($ ones that is) VANISH! What a nice fantasy, almost worth the dollar to purchase a ticket.

I know that I shouldn't say this because if I did win the lottery I would completely disavow any words that I'm about to spew. However, I have given a lot of thought to this since our state began the lottery in 1994 and I have this recurring thought that winning the lottery is almost the antithesis of what I am attempting to overcome, namely "spending, buying, consuming."

I'd want to be a smart lottery winner and not throw the money around in a blaze of glory. AND honestly, it would almost be anti-climactic to the progress I have made in my frugal way of life. I will most likely never have to encounter this and even though it is really entertaining to think of being debt-free within a matter of several days, I think I need to continue to plod on my current path.

DISCLAIMER: This comment will self-destruct upon notice from the Texas Lottery Commission. :)

[Brad]

Lump sum, for sure. Call me cynical, but I don't trust that I'd ever see the full payout due to unforseen circumstances down the road.

I'd take the lump sum, invest it wisely and securely, and live off of it. A lot of people say they'd continue to go to work, but not me . . . not here anyway. Quitting my job is the very first thing I'd do, once I knew my winnings were safe. Then I'd figure out what to do with myself . . . something tells me I could come up with things that would be far better than work.

[JJ in Balt]

Ahhh yes..... and what a dream! Take the Lump !

Like with any Life Changing event - I would guard against making too many rash or ill thought out decisions. (Though, of course I would quit my current job since my new "job" would be managing my money.)

And what would we do with the money (save it, pay off debt, splurge?): The answer would be yes, yes and yes. 1) Save big time and invest so I can get a growing snowball of investments that both produce income and provide for growth of capital. Set up and start funding living trusts to assist my family.2) I don't have much debt except for my house but I would probably pay that off so I can...3) Splurge! We always wanted a vacation home in the Netherlands - ahhhhhh a canal house! 4) Pick Three charities and provide significant financial assistance.

Well, I just finished my lunch at work - back to reality!

-jj

[William Tanksley]

Lump sum, agreed. The argument that I might spend the lump sum is a fallacy: I would be more likely to spend the small payouts, since I would have to exercise discipline EVERY time one came in.

So take the lump sum, pay off debts, and put the rest where I can't easily touch the principal. Work out the details from there. This plan does not include "quit work", but "the details" might include that.

[Ryan]

Lump sum for sure. First thing I would do after taxes would be to put as much as I can in 5%+ money market accounts that would be FDIC insured. This would be my income producing money. Next I'd put about 50% in stocks, mostly index funds that I probably would never touch, this would be my retirment money. Then I'd buy a $500,000+ house. Quit my job of course.

[Jo]

I'm not totally sure what I would do, but the lump sum sounds like the greater choice.

If I win, I would
A) SCREAM!!!!
B) Get some good advisors
B.5) Unlist my phone number and get a new address.
C) Invest, Save, and learn to live off of the interest.
D) Pay off Dept
E) Give to Charity and Set up accounts for my nieces and nephews that they couldn't touch until they were older and mature (18 is too young, unless it was being used for tuition). And give money to my parents.
F) Splurge and vacation. I would put on my nicest clothes and walk into the jewelry shop from my "home town" and tell them they could make tons of money off of me, but they are too mean to "commoniers".

That's what I would do...makes me think I should go buy a ticket, $140 million for Wednesday!!!!

[Blaine Moore]

I wouldn't win because I never play. I invest the money I'd waste so that I'm (almost) guaranteed to do better than throwing it away. The lottery is a tax on people that can't do math.

If for some reason I did get a winning lottery ticket (my mother has been known to give lottery tickets as gifts before) and I still had the choice in the matter I would go with the lump sum. It's a windfall; get it all up front when I can be sure to get it and move on with my life. Pay off the mortgage and school loans, invest the rest, and decide how and when and where I want to work.

I like Traciatim's system about playing off financial firms against one another to see who does the best with their piece of the pie.

[Zachary]

I had a friend tell me just the other day that he thought the lottery was the best way to get rich. And another friend insisted that he didn't need a Roth IRA because he stuffs his mattress with cash. *eye roll please*

[plonkee]

The lump sum for sure.

I would take the day off work, or maybe even the week. I would pay someone to make my house beautiful. I would book a holiday somewhere that I really want to go. Then I would plan what to do with the rest of the money, including donating to charity, giving some to family and friends, investing in sensible investments (index funds and the like) and other exciting things. I wouldn't give up the day job for at least 6 months.

[Rich Schmidt]

Not being a lottery player, I'd not really thought about it, but if the pros say the lump sum is best, then that's what I'd do.

And then? Invest it very safely and carefully, with the help of a financial adviser or two. After giving a tenth of it to our church, of course. :) Though even with that, I'd probably sit down with the church board and a financial adviser to figure out how best to make that gift.

Would I quit my job? Move? No. My wife and I both love what we do and aren't in it for the money. (I'm a pastor, and she's an elementary school principal.) So we wouldn't make any changes at all, right away...

OK, that's not true. Three expenditures we would make right away that I can think of: (1) upgrade to the HD programming with dishNetwork, (2) pay someone to finish our landscaping & hardwood floors, and (3) buy a new car to replace our 10-year-old Saturn wagon. My wife's been wanting a Mini...

Still, all that daydreaming isn't enough to make me go buy a ticket. :)

[LotharBot]

Lump sum.

If I had any debts (which I don't) I'd pay them off. Then I'd buy my parents' house so they could move into a place of a more appropriate size, and my wife and I would start filling the larger house with kids.

The majority of the money would go into investments... low-cost index funds, maybe a couple of higher risk stocks with a part of the money, and some sort of fund that I could pull money for kids college tuition without penalties.

My wife and I would probably live off the interest for a year or two while we did some remodeling and started pumping out kids, and then I'd go back to work and she'd start writing books.

I'd definitely put some of it towards various charities. I know of some in my home town that are very good, so I'd figure out what their needs were and make sure they were met. Then I'd ask them to recommend other charities they liked and knew were effective.

[Max]

"If you take the payments, at least you know you CAN'T lose it all since you can't get at it all."

Not true. You can easily sell your annuity interest to any number of finance companies, and then waste that. You can also incur debt secured by the annuity interest.

It's happened. Dozens of times. There are a number of 'millionaires' whose annuities go straight to creditors and they're back where they started.

Never underestimate the ability of people to behave irresponsibly, and the willingness of others to capitalize on it.

[EMF]

With a stated prize of $10 million, that's the amount you would eventually get with the payment plan (before taxes). If you want a lump sum, they'll calculate Net Present Value based on the prevailing interest rate and you'll get around 1/2 the stated prize. Read the fine print on the Powerball web site. After adjusting for NPV and paying taxes, you would probably end up with a lump sum of around $3 million.

$3M invested in an index fund would I think return around 2% in dividend or around $60K / year. Which should increase to at least track inflation as the economy grew. If you were already debt free and didn't live extravagantly, could allow you to retire immediately.

Myself, I'd plan the future out, probably working a few more years but retiring before I would otherwise. As far as buying a McMansion and a Jaguar, probably wouldn't do that.

My ex-wife on the other hand, would take the lump sum and spend it all right away. Yes, she's talented that way. And since the tax withholdings wouldn't cover the tax bill, she'd be dead broke and also have the IRS after her for the rest of her life.

I agree with the point that Max made in the last comment. These companies will also give lump sums in exchange for structured settlements (which paid over time) -- I've seen their ads on TV.

[Ricky]

Myself? I guess it would just depend on how much the jackpot is. I would be more likely to take payments, because I'm Young, Have a Job, and like knowing I have money.

It will also give me a reason to tell people that I can't buy them anything.

[JM]

I would to what most any normal sane person would do upon winning a large sum: purchase an island and lure unsuspecting people there to live out the remainder of my days hunting the most dangerous animal: man.

[FamilyFinanceBlog]

I'm sure I would still be pretty frugal. I would certainly buy a house instead of the condo we live in so that the kids would have a yard. But I wouldn't buy a $3 million McMansion, I'd buy something with a decent yard (hard to find in SoCal) and enough comfortable living space.

Other than that, everything would go into diversified investments (if it was a large enough payment, some of those investments would be nice, stable bonds) and we'd live off the income only (minus a hedge on the income for inflation and stock market adjustments). Whatever we had left over in a year would go to charity and to fund and help out our family.

[Ed]

JM - your comment blew my socks off. Nice work. I'm still laughing!

As for me, I'd pay off student loans, buy myself a modest car, and buy my first place - I'm 24 living near the ocean in Florida, so I think a condo would be a great investment. Other than that, I'd probably live as simply as I could, hire some smart money people to look after the cash, and travel.

[Louie]

I'll tell you tomorrow when i win it...

[Troy]

I would take the lump sum and put a portion away, continue to tithe, use my current knowledge of investments to live off of the interest and start my own business.

[Samir Nagheenanajar]

You know what I would do if I win the lottery?

I would invest half of it in low risk mutual funds and then take the other half over to my friend Asadulah who works in securities...

I would take the lump sum, give 10% to my church as any Christian would do (it would be God's doing that I won), pay off debt, pay off my family's debt., invest, quit my piddly job, become a real renaissance woman and learn various trades (something in allied health perhaps), save for my children's college, move in a bigger house, and tell my husband to take a break. He needs one! A European vacation would be just what he needs.

Yes, changing my address would be smart as well. Who knows who would be calling for hand-outs.

[hiten]

I win teh lottery this feb 2009 . I take lump sum , I will donate to10% temple and 15% to children hospital. 50% into property , 5% will be given to the family . rest would be in the saving accounts for next 5 years. and I would get more experince in life before I understand to run my own resturant.

[Jake]

Traciatim has an interesting idea. Dress like a bum and employ ten firms to manage his money! What a stupid idea....no wonder he's Canadian. You are a wealthy individual and you want people to take you and your money seriously....so why not dress for success? I would also hire no more than 3 firms. You still need to hire a tax attorney and a lawyer. If you are going to hire 10 firms to manage your money will you also hire 10 tax accountants and 10 attorneys? I think not! With a plan like that you won't get far no matter how much you win. Besides, Canadians are not allowed to win any money from US lotteries. You guys ever heard an American win a Canadian lottery? I didn't think so!