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• What’s the difference between a funeral and a wake?
• Is it really illegal to pick a California poppy?
Money for nothing
Really, who among us hasn’t stopped at the gas station on the way home from work, glanced at the latest lottery jackpot total, and thought “Ah, it’s only a buck, why not?” Exactly. All of us do a bit of daydreaming about what we’d buy with our winnings, things we would do for family and friends, and so on. But almost no one considers how they should receive their winnings — lump sum or installments?
By the numbers
At first glance, the lump sum payment sounds pretty awesome, doesn’t it? You win a $10,000,000 lottery and a few weeks later you get a check for $10,000,000. Except for one problem — you don’t.
Lottery winnings, like any other (legitimate) income are taxed — both at the federal and, if applicable, the state level. The percentage of this tax, on average, runs around 45%. So your cool $10 million just became a not as cool $5.5 million. Which, admittedly, is still a pretty impressive chunk of change — but why not get more of that $10 million in your account?
This is where the installment payments come in. In California, for example, the default term for annual payouts is 26 years. The payout is made as a percentage of the total jackpot, starting at 2.5% at year one, finishing at 5.1% on the 26th payment.
By breaking out the payments over many years, you can reap several benefits. For starters, most lottery winners who choose the lump sum payment — in addition to losing over 40% of the jackpot — tend to blow their winnings within just a few years. By accepting an annual payment, it’s easier to look at it as a salary rather than a prize, and thus easier to invest and spend properly. Annual payments will also end up being taxed at a far lower rate — so more of that $10 million ends up in your pocket and less of it in the government’s pocket, it just takes longer for you to get it.
So the next time you drop a buck on that ticket, don’t think of it as a huge $10 million dollar prize — think of it as making $200,000 to $300,000 a year for the next 25 some-odd years, guaranteed. I don’t know about you, but I’d be pretty happy with that.
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