The lump sum payout is a surprisingly popular way for Powerball winners to accept their payouts.
While there isn’t just a ton of information available regarding the history of how people accepted their payouts, talk to most anyone fantasizing about it, and there is a strong sense that they wish to “take the money and run.”
The problem with doing that, as many of you are likely well aware, is that it greatly reduces your total earnings.
In the case of the current $1.5 billion jackpot, you would automatically see a 62 percent reduction in the total. Putting pen to paper, that means a lump sum payout of $930 million.
If only that’s where the deductions ended!
Different states approach lottery winnings in different ways. Some, like Arkansas, for example, tax it as normal income, and since it’s about 42,000 times what the average single Arkansan makes, you would definitely be paying the max rate of 7 percent.
Add that to the max federal rate of 39.6 percent, and you’d be saying goodbye to an additional 46.6 percent of that reduced amount. Approximately $496,620,000 is what you would be left with, which isn’t bad until you start doing the math and realizing that of the $1.5 billion prize, you’ve already given up more than $1 billion!
States like New York are even worse about taxes than Arkansas, charging both state and local taxes in addition to the max fed rate, and if you’re curious about how badly the hit will be in your state, USA Mega can show you at a glance.
“Big deal,” you may be thinking. “It’s still $496 million!”
That’s a fair point. It would be rather difficult to spend that much money in a lifetime, yet there is a laundry list of lottery winners, who won obscene amounts of cash — in the tens and hundreds of millions — and wound up flat broke.
On Tuesday, the New York Daily News featured a roundup of tragic stories involving lottery winners who went broke, if you are in the mood for some real-life horror stories.
That’s because many lottery winners are not ready for what a massive windfall of cash brings with it. Getting contacted by “long lost relatives” and even people who are complete strangers with pleas to help pay for things; having family members try to kill you; having others turn against you because you didn’t help them enough; cracking under the pressure and succumbing to expensive and deadly substance addictions — these are all realities that past lottery winners have faced.
Reducing your overall take by accepting the lump sum payout could only expedite similar fates.
Instead of giving into the temptation of that giant (but reduced) check, you should consider your situation.
If you are a young person, who will in all likelihood live an additional 30 years, taking the annuity instead of the lump sum payout is a wiser move.
For starters, your take-home will be much higher. In the Arkansas case, it means you’d be taking home $801 million — more than $300 million more — than if you took the lump sum.
That’s, at minimum, an extra $10 million per year, or $26.7 million per year post-tax.
Not only does such an amount allow you to indulge the extravagances that come with a big lottery windfall, it also helps you know when to pull back and invest conservatively so that the money you’ve won continues to generate interest income, thus growing to an even larger pot throughout your lifetime.
The thing about a lump sum payout that is so dangerous: you’re still out of your head trying to cope with a sudden change of lifestyle. You’re vulnerable to making a lot of bad financial decisions that can snowball and create more problems than they actually solve.
Therefore, when you log on at 10:59 p.m. EST tonight to confirm that you’ve won, remind yourself to have patience.
If you win tonight, which route will you go: lump sum or annuity? Sound off in the comments section.
[Image via ShutterStock]