would you take a lump sum payment?

[KTP]

I did my one stupid financial blunder for the year. I bought $5 worth of lottery tickets for the $5.4 mil prize. I do this once a year in January, then no more for the year.

Ok, so I know I just threw away $5, but it got me thinking. What would be the smart thing to do in the current economic conditions if you hit a jackpot like that? Would you take the $5.3 million over the 20 (I think it is 20) years or would you take the 50% option lump sum?

I could see it both ways. Currently the highest tax bracket is lower than it will be in 2011, so that would steer toward taking the lump sum. Also, I think we will be in for hyper inflation over the next 10 to 15 years so that would also steer toward taking the lump sum and protecting it.

The downside of taking the lump sum is you only get like $1.5 million after taxes, and there is some risk you might invest poorly or feel more of an obligation to give away too much.

What would you do?

[irmanator]

I'd stick the 5 bucks back in my pocket.....

[disneysteve]

I would always choose the lump sum without exception. Better to have the money in my pocket and in my control.

I have absolutely no doubt that I can invest the money to earn at least what the annuity would have paid and almost certainly more. Having the lump sum gives you many more options.

If, however, you are the type of person who doesn't have a handle on spending and saving and tends to burn through bonuses and such with no idea where it all went, you'd do better to have the forced discipline of the annuity.

My daughter will be getting a financial settlement from a legal case when she turns 18. I wanted to take the lump sum for the reasons I said. The lawyer, who I've known for many years and greatly respect, convinced us to go with the annuity because in that case, it is not a good idea for an 18-year-old to suddenly have access to a large lump sum of money.

[jIM_Ohio]

Lump sum... any amount of money over $150,000 changes my life considerably... so might as well get that money now while I am still alive LOL.

[jefffou]

Lump Sum for me too....

With the pressure on various municipalities and insurance companies these days, I think I'd rather pay the tax, have the cash and enjoy the windfall!! I'm not sure, however, who is on the hook for that liability. Probably some annuity insurance company.

Honestly, I'm not sure either method would change my life a whole lot anyway. At least I hope not.

Jeff

[disneysteve]

Lump sum... any amount of money over $150,000 changes my life considerably

Honestly, I'm not sure either method would change my life a whole lot anyway. At least I hope not.

I think everyone has an amount that would be life-changing, whether you have taken the time to calculate that number or not. And everyone's definition of "life-changing" is different. It might be something as simple as being able to buy a new car or something bigger like having enough for a down payment on a house or something really big like having enough to retire early.

OP is talking about getting $1.5 million as a lump sum. I sure that amount would be life-changing to some degree to all of us here in this forum. Personally, that would advance my retirement age by 7-10 years.

[Broken Arrow]

I often find that the answer will come down to the financial aptitude of the windfall recipient, and how they manage it. All things being equal, I don't think it matters if it's annuity or lump sum.

That said, I understand that not all lottery annuities are the same, and not all states even give you the choice of a lump sum.

Finally, depending on the nature of individual situations and the amount at stake, you'll also want to have resources ready in advance. Blind trusts, tax attorneys, financial planners, lawyers that deal with incorporations, and security are just some examples to consider.

Most lottery winners don't seem to consider any of this. So, they're back to being broke or worse off within a few years. Most financially astute people probably don't play the lottery to begin with.

[KTP]

I buy a ticket (well $5 in tickets) once a year in January. After that nothing. The only other gambling I do aside from investing in the stock market is maybe once every 2 years a trip to Vegas to play poker. I go with a set amount to lose ($500) and so far have always come back ahead (I must be good at poker :-)

I realize you only have a slightly better chance at winning the lottery if you actually buy a ticket (there is a small chance you would win anyway by finding a lost ticket or having someone give one to you). $5 a year isn't going to break me

[Scanner]

It is probably smarter to take the annuity. . .because your accountant can probably combat taxes better that way moving some of the money into shelters. . .and still probably "double" your lifestyle.

I did a similiar thread about what the break-even point is for taking "cash" over an "asset", like a house.

Usually, I'll take 25-50% on the dollar for a cash advance. Liquidity is powerful.

That being said, taxes are the main enemy in this scenario. I know I'd consult an accountant and probably let him/her decide for me I'd be so ambivalent.

[sweeps]

I would always choose the lump sum without exception.

No exception? What if I offered you a lump sum of $20,000, or $10,000 every month for the next year? (And you trusted my credit-worthiness.)

By the way, how've you been DS?

[disneysteve]

No exception? What if I offered you a lump sum of $20,000, or $10,000 every month for the next year? (And you trusted my credit-worthiness.)

By the way, how've you been DS?

Hmm. Ok, I'd make an exception for that. I meant no exception in the usual lottery offer of a $2 million annuity or $1 million lump sum, or something like that.

Doing fine. Thanks for asking.

[Slug]

Lump sum. I trust me more with my $ than I would ever trust the government to take care of it for me.

[KTP]

Thanks for all the comments. When I win tonight I will probably choose the lump sum option and get back to you guys on the best way to invest it. I just hope nobody else had the same numbers.

[wincrasher]

Generally an annuity is only as good as the company who sold it. They are regulated, depending on your state, but they are not insured to their full value, if at all. You can have alot more security by taking the lump sum and investing it in a variety of investment vehicles - many of which can be insured.

Steve, you shouldn't have been locked into an annuity just to dole out the money to your daughter in increments - you could have done that with a trust.

[Broken Arrow]

Thanks for all the comments. When I win tonight I will probably choose the lump sum option and get back to you guys on the best way to invest it. I just hope nobody else had the same numbers.

Thank you for keeping us little people in mind!

(edit: By the way, I didn't mean to imply anything about anyone's financial aptitude here and playing the lottery. I know we all dabble in things in our own little way, but I was thinking more about habitual players that like to sink in substantial amounts on regular intervals when I wrote about that.)