There are Powerball jackpots, and then there are POWERBALL JACKPOTS. Tonight’s Powerball jackpot is at $403 million (annuity), and $243.9 million (cash), which according to news reports is the 10th largest jackpot of all time.
Every wonder what you should do if you win Powerball? The truth is that with a jackpot this large, you’d have to mess up pretty bad for it to be much of an issue. Smaller jackpots can be trickier, if you are trying to live the rest of your life without ever having to work again, AND live a larger than life lifestyle.
Choose Annuity or Cash
There are two options to choose from if you win the Powerball jackpot. Contrary to popular belief, the value of both choices is the same. The actual jackpot is $243.9 million in both cases. However, if you choose the annuity, the lottery invests that $243.9 million on your behalf, and then sends you 30 checks over the next 29 years. The difference between the announced annuity amount is nothing more than the interest that builds up over those 29 years of payouts. Hypothetically speaking, if you were able to invest the money in the same way that the lottery does, you would get the same payments from choosing cash as you would from choosing annuity.
Why do you get payments for 29 years for Powerball annuity? Because, you get the first payment right away. For example, if you won in March of 2017, you would get a check for $8.13 million in March or April. That leaves 29 more payments, one each year for 29 years.
So, should you choose annuity or cash?
Most financial planners would recommend you take the cash prize. This is for two reasons. First, is that then they get 1% (or so) of $243.9 million each year for managing your money. Second, is that you can actually control how the money is invested, and theoretically tailor such an investment to your needs.
The reality is that if you take the annuity of an amount this large, you are going to end up investing a lot of it anyway. Most people don’t spend $8 million per year. I suppose you could, but even if you went big that first year and bought houses, cars, vacations and stuff that totaled $8 million, you wouldn’t necessarily need another house and other stuff in the following years. Eventually, you might be investing at least a few million each year.
The main reason to take the annuity is to remove any stress around the money. One of the difficulties of winning the lottery is that it is a one-time event. This means you have to manage against spending too much money for the rest of your life. This is very different than having a large income, in which case, there is always more money coming should you overspend or make a bad investment, or other mistake. It is that ongoing income that let’s people “learn” how to be rich even if they make some mistakes early on.
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Even if you do everything right, the stress of worrying about your money and wondering if you are still doing it right, can be difficult to deal with.
That isn’t to say that you shouldn’t take the cash, if you are willing and able to take on the management of it. You’ll lose a lot to taxes right up front, but then, with some careful investing, it shouldn’t be difficult to generate something like $2 or $3 million per year, without even touching the principal. Unlike with an annuity, you could manage the taxes by choosing tax-advantaged investments. Of course, you could do the same thing in reverse with the annuity. Use just $2 or $3 million per year and the rest gets invested where it grow. By the time you need to sell anything, you would be paying the much more forgiving long-term capital gains tax rate of just 15%.
In the end, with a major size lottery jackpot, either choice would end up being just fine. Smaller amounts can be trickier. A $20 million annuity for example would be less than $1 million per year. That’s great, but if you are younger, you’ll need to think about what happens after the 29 years are up. In that case, the smartest thing you can do is treat the payments like income from a job, complete with retirement savings.
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Or, take the lump sum and take a look at whether you really can quit and never work again on a $5 million nest egg (50% as cash value, then 50% to taxes). If you’re 50 or 60, that really shouldn’t be a problem if you keep a modest lifestyle. If you are in your 30’s you can make it if you invest smart, and stick to something like $200,000 per year in withdrawals.
Don’t worry too much, though. Your odds of winning are not good. But, if the universe smiles on you, carefully evaluate your options.