If You Win the Lottery, Take the Lump Sum

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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!

[man]

who ever said that there was a percentage on what to tithe to the churches?????

[Terry]

To man.

I always thought that 'tithe' meant 10%.

[Somnolence]

Oh, I would bequeath a certain amount to relatives or family members all right, only on my terms. I would not give any of them a lump sum- rather, I would suggest they cite a "reasonable" amount on a monthly or quarterly basis for such things as home repair, health supplemental, car repair or purchase, etc. I would not give in to extravagance on their part because I personally wouldn't purchase an elaborate wardrobe. I don't even own one suit now (sportcoats and ties, yes). As far as tithing 10% of the lump sum to the church, no, I am never consistent in contributing to the collection plate, and wouldn't be then either. It varies---10 percent one Sunday, 7 percent the next Sunday, 3 percent the next, etc. until it revolves around again. At age 56 I could certainly get by on $30,000 to $40,000 apiece for my wife and me, even if inflation sets in, since we have no children or grandchildren, and have always stayed away from socializing a lot. A feeling of security would certainly be there.

[Rose]

To Man... 10 pct tithe is Biblical. Nowhere in the Bible does it say you have to give to an organization. We are supposed to give the 1st 10 pct of whatever we have..so before taxes. Whether a person is Christian or religeous it is still good to give to where your heart leads you. There are blessings to be had when anyone gives no matter their reason for giving. I think it's a universal law. :)

[dan]

id get wasted man and live the good life no lie. just wanna have fun

[Montrail]

I would after taxes donate 10% of my winnings to different organisations and family, before I would spend one red cent on me and my children. Once that 10% is alloted, I would then focus on me and my children. If I buy a house, it would be to the point if I got broke tomorrow, I could still afford to keep it or buy land and build my dream house(I am leaning towards building). Go back to school and learn the in's and out's of financing, investing, that kind of thing. And say yes for a week to what ever my children wanted (within reason). I am so sure I will win I have this plan already written out, and ready to implement. lol!! Until then it is off to the standard way of living.

[Julian]

If your under age 50, the annuity would be best if the amount won is over 20 to 40 million dollars. Be serious, the only individuals who could handle a very large "lump sum" of money are the ones who had it to began with because they managed to build their wealth over time and learned how to manage the money appropriately without making bad investments and proper training taught them how to watch out for the Ponce scheming "money sharks" out there who pray on the novices that just got a large "lump sum" of money and is GUARANTEED to be greeted by these nickle slick suit and tie individuals who's only goal is to take your money and also cleverly fool you into investing large sums of funds usually into fictitious things. They are professional smooth talking grifters. The annuity over time depending on whether if it's 20+ million won will teach you how to properly manage your money, getting 1.5 million after state and federal taxes a year (the Lottery increases the annuity each year) for up to 30 years isn't bad at all!

[Hopeful Romantic]

10% of my money to the church! Are you out of your mind???

10% of my money can sure go to funding things like malaria, typhoid just like the Gates foundation are doing. Now that's money well spent.

Beyond that, helping family and friends.... the church ain't getting none of my money.

Just a thought...

[Lori]

Lump sum for sure...First I would call my financial advisor before I went to the lottery headquarters. He could tell me where to invest and put my money. If I were to win $5 million I would not quit my job. If I were to win over that amount I would. There are silly purchases I would make such as diamond stud earrings at least 1 to 1 1/2 carats per ear! lol I also need a new car.....so I think a fancy mini cooper or Audi, or Mercedes or Volvo, but no more than $50K for the car. Then I would fix my house up. Then set up my nieces, nephews and great nieces and nephews with accounts for their futures. I would make a will too. There is a specific charity that I would love to be involved in so I would become a patron of that charity.

If I were to win an obscene amount of money, I would buy real estate. No too grandiose but location, location, location. A small condo in Manhattan to indulge in the theater and NY City shopping, a home on the ocean in Maine perhaps, make sure all my family members have cars and homes, and basically spend a lot of it as I have no children.

This is one of my most favorite fantasies! I use it to fall asleep at night! lol

[buzzsaw]

i would take the lump sum. no doubt. after that i know i will need some sound finacial advise. face it, if you dont know money you will soon part with it. i use to think 100,000 would make me rich. not now. or, maybe it will. i dont know money.

[Clp]

I would go to college and get an education for a career that would set me up for the future if I actually do happen to blow through the money. I would settle debt and then set up my children for collegiate success. The two things I would splurge on is a fancy home and a I would want two to three cars for us that would eventually be given to my children which I have three of. It's nice to have dreams but in reality I stay and know that I will most likely never win but to pay a $1 to feel happy for a while with dreaming is worth every penny :)

[Craig]

The "Face" Value of a US lotter is generally about 1/2 the "Advertised" value. So if you won $100 Million, the acutal Annuity value is about $50 million. This one time payment would be taxed by the federal government immediately for 25% or $12.5 million, leaving you with $37.5 million. This would skyrocket you into the highest tax bracket and on that years tax return you would have to pay an additional 10% tax (to bring you to the higher bracket 35% rate) or an additional $5 million...this would bring your "Net" payment after taxes to 32.5 Million dollars on a $100 Million dollar payout.

Depending on the game the payout could be 20 or 26 years, the high games now are 26 years....to "break even" (realizing that you would have to pay taxes on most of your newly aquired interest income, unless you were able to shelter the hell out of it at a 35% rate) you would have to be able to generate a "NET" 2.5 Million per year (100 Million/26 years minus 35% tax = 2.5 Million)

This equates to you needing to earn almost 12% per year to match the "annuity" payout for the next 26 years.... (32.5 Million x .12 = 3.9 Mil minus 35% tax = 2.52M)

This assumes that you spent the entire 2.52M each year and no "compounding" interest came into account due to you not spending that interest income.

This is why for the "MAJORITY" of people, the annual payments are a much better idea. They don't have the ability to generate 12% a year (and not devalue that by spending ridiculous amounts of the 32.5M starting sum)...for comparison, if you "gave away" 10% of that money and blew another 10% right away, you would then need to make 15% per year instead of 12% to equate the annuity payments. Inflation really isn't the major consideration as it will affect both scenarios in the same fashion.

[Craig]

Now lets look at what "could" happen with some "compounding"..... If you kept out 4.5 Million bringing your "investment" total down to 28 Million and earned a respectable 5% after tax rate (not ridiculously hard...would equate to 7.7% taxable interest rate, or simply a tax-free investment that yields 5% each year), over the 26 year period would end up with that 28M growing to the face value of the Annuity or almost $100 Million.

The key item to realize when "dreaming" like this is the majority of people will take much more additional "risk" than they need to and end up losing much of their lump sum due to poor investment choices, scammers, leeches, etc....

[Craig]

Now lets take a quick peek at what you "could" do if you took the "annual" payout and simply didn't "blow" it all.... The annual payout on 100 Million over 26 years is 2.5 Million after taxes (100 Million / 26 years, minus 35% tax) If you simply gave yourself a $1 Million dollar yearly salary...to "Blow" as you saw fit, and put the remaining 1.5 Million into the same 5% tax free investment, or 7.7% taxable investment, at the end of the same 26 years you would have a balance of approximately 87 Million dollars, and you would have been spending 1 Million a year, living "high on the hog".....

[Craig]

Now lets see what you "could" do if you took the lump sum on a 100 Million dollar lottery at 26 years and simply "paid" yourself 1 Million per year "after tax" money. We will use the same 5% tax free or 7.7% taxable investment vehicle, as much more than that is simply not feasible on a consistent basis.

If you paid yourself $1 Million, the same as you would in the annual method above, and reinvested the remainder each year, after 26 years you would have a balance of approximately 66 Million dollars, and you would have been spending 1 Million a year.

[Dream big]

Situation: Winning $10,000,000 dream
State: California (FED 25% and state tax free)

Take home: $7,500,000 (should be less but just assume)

1. $2,500,000 in saving account earn .90% (highest at 01/2012 found) - earn $22,500/year and give to parents as income
2. Paid off my $650,000 mortgage to $300,000 left. Re-fi to 3.875% (as off 01/2012).
3. Put $100,000 wife checking, and $250,000 wife saving account.
4. Put $100,000 my checking, and $250,000 my saving account.
5. Put $1,000,000 into joint online saving account
6. Put $2,000,000 into Bullionvault to purchase gold and silver.
7. Put $1,000,000 into forex account
8. Put $1,000,000 in US bonds or iBonds (for emergency)
9. The leftover go to two/three management firm for investment.
10. hire a firm to handle my donation...weed out scanvagers...

Goals:
new house in 1.5/2 years
new sport car for myself in 1.5 years
one vacation home @ hong kong, malaysia, singapore, Nevada or Canada or wherever...

Hard earn money are those you can keep. Money from the sky will come and go unless you know when to open the bucket to capture the money or close it to prevent heat to dry it out.

[Lydia]

I saw so many choosing lump sum, and I sit and wonder why. I Like how Craig explained it. You get more money if you take the annual payments, and I hadn't even thought of the crazy amount of taxes you'd have to pay. That is a good point. I could not afford that, and since I am young, 26 years is no big deal. I guess it would be different if I was about to retire, and it would depend on the amount. My mother taught me this was the best way when I was a kid, so I am a little surprised to see so many take the lump sum. It just does not make sense to me. Well, I would tithe, pay off all my debt, buy a house and invest. Then, I could continue to provide for my family and help others, and maybe do some travelling and start a rock band. :)

[John Doe]

The reason you want the lump sum is to invest it in something where you accrue interest. If you take annual payments, granted you won't be taxed as much but you won't be able to do make any money either.

[BOOGSTER]

Assuming the prize was $10,000,000.00, I'd take the cash value. That leaves lets say 6 million. Minus the initial 25% federal tax leaves $4,500.00. Knowing that uncle sam is rather greedy and will come after his additional 35%, I'd send the government a check for $1,575000.00 as the anticipated final tax liability for that year. That leaves me $2,925,000.00. I'd invest 1.5 million as interest income, purchase a home (cash) for about $500,000.00 and tuck away anticipated home taxes for the next 20 years in a separate account. That leaves me about $875,000.00 of which I'd keep around $100,000.00 in my interest checking account, I'd send $300,000.00 to my ING savings account. Furnish my home with about $75,000.00, buy a new car in the $30,000.00 range. That leaves me now with $370,000.00. I'd help out family with about $100,000.00. I'm now pretty well set with $270,000.00 liquid cash free to do with as I see fit. Oh yes, as for the church. I'd get a shoe box, fill it with $50,000.00 cash, toss it in the air, and everything God catches he can keep!

[Yvonne Jacobs]

Bet no one will believe this but Id keep 10% and the remainging 90% would be to spread the gospel of Jesus Christ. Think I'm crazy watch and see

[SimpleGuy]

I'd take the lump sum and be a complete jack ass with it. I just don't care since it was not hard earned money so screw it why not. Lmao.........JK sounds funny but anyway I don't know jack about investing so since I'm very simple. I would just get a very nice condo since big homes make me nervous lol. Buy a nice car like and Audi RS5 and I would go to school and learn this investing game then I would play with only 50% of what I had left. If I loose that then screw it I would just live the rest of my life with a little less than half of my lottery winnings. I'm very stingy so no family of mine would get a red cent from me anyway. And I would walk around in sweat pants and a t shirt all the time. Lol none of that extra stuff excites me. But that's just me. Off to the gym I go now.

[Mike Moomey]

First thing I would do before cashing my check of $42,000,000 would be to get an attorney that might also be an accountant and tell him that he will need my OK to spend any of my money. Then I would pay off the BMW that I bought for my daughter. Then set up $50,000 for each of my 8 grandchildren to be paid to them at age 21, 18 if going to some type of school (vocationnal or college.I would buy my youngest brother a car and give him some furniture for his home. My wife and I would go on a trip to Italywitin the first year

I would invest my money in an index fund and any other SAFE place to give me an annual income of $100,000 a year to live off of.