Why You Should Avoid The Lump Sum If You Hit The Powerball

Senior Contributor
08.10.17 13 Comments

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This weekend, lottery fever descends yet again on America. While it’s no billion-dollar Powerball jackpot, the combined $735 million jackpots are turning heads. So, as this weekend’s drawing nears, here’s what you need to know:

First of all, the hope of hitting both jackpots is, how do we put this politely, excessively optimistic. According to the Mega Millions official site, your odds of winning the full bank on just that prize is 1 in 258,890,850. Allstate’s actuarial team found the odds of hitting both are about 1 in 75 quadrillion. So, perhaps just put your money on one, although we suppose if you’re going to gamble, go all the way.

If you do beat the odds and win one (or both), though, trust the experts and take the annuity, where you’re paid the prize over thirty years in steadily increasing installments. You see, if you hit the numbers and pick the lump sum, you get the “cash value,” a substantially lower $238 million. And that comes with a large tax bite, as lottery winnings are taxable income, so you’ll owe the government 39.5% of that, 25% of which it takes right off the top. Then there are state taxes, which will probably bite another 10%. So really you’d be collecting a mere $119 million.

There are, of course, conflicting opinions about this: Some even recommend splitting the difference and buying an annuity with your lump sum. And depending on your financial situation (*COUGH*STUDENT LOANS*COUGH*) it might not really be a choice at all. Still, it’s worth noting much of the claims that the lump sum is better hinge mostly on the person who wins being completely rational and forward-thinking when suddenly coming into hundreds of millions of dollars. History tells us this isn’t usually the case. Even “small-time” lottery winners have openly discussed how winning just a million dollars messed with their perceptions of money and happiness.

And really, $119 mil? What is that!? Is it even worth bothering at that point? Fine… maybe.
(via CNBC)

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