Should I Take The Lump Sum Or Annuity?
When you win a lottery, you are often given the decision of whether you want a lump sum payment or if you want an annuity. Both decisions have advantages and disadvantages. It comes down to the type of individual you are and whether you have a sensible plan for your lump sum. But be careful because most winners run out of their winnings within five years.
You May Need the Money
One of the benefits of a lump sum is that if you intend to use it for a worthy cause, such as going to college or starting a business, the lump sum can make your dreams come true. However, if you receive everything all at once, you may also be tempted to squander your money on frivolous purchases that might feel good in the moment, but will not help you in the long-term.
Taxes Play a Role
Regardless of what you do with your lottery earnings, you will be in the top income bracket on your receipts regardless of what you do. The biggest factor is whether taxes will go up or down over the years. Given that tax increases and decreases are unpredictable, it can always be difficult to tell.
Inflation can make annuities make less sense because the money you receive will purchase less in the future. Therefore, if you intend to invest, it would make more sense to receive the lump sum today. Your investment can grow your wealth over time if you choose stocks from companies that have a good track record and if you purchase these stocks at a discount.
You Can Put a Lump Sum in Trusts
Another option is to place your lump sum in a series of trusts so that these payments can be released to your children or family members when they have reached a certain age Still, using trusts can backfire because you may wish to later distribute your winnings differently based on the behavior of your children, but you will have relinquished control.
Lump Sums Offer a Smaller Payout
On the other hand, with some lotteries, you receive less of a payout when you take the lump sum than when you take the annuity. You will not receive the jackpot advertised by simply taking the lump sum.
How you are able to manage your money will affect whether you should get an annuity or not. Annuities are a type of forced discipline. But if you really need the lump sum in the future, you are not locked in because you can sell your annuity to receive cash.