Hitting the winning numbers in a lottery can be a life-changing experience.
On Tuesday night, one lucky ticket sold in New Jersey that matched all six numbers in the $202 million Mega Millions drawing.
The jackpot will reset to $40 million for Friday night's drawing with a cash option of $28.1 million.
One of the immediate questions, whenever someone wins a giant jackpot, is whether that lucky person should take their winnings in annual payments or accept a lump sum.
Is one better than the other financially? Let’s break it down.
ANNUITY: The installments are paid out as one immediate payment followed by 29 annual payments, according to the Mega Millions website.
Pros: The biggest allure of the annuity for any winning or windfall is having a guaranteed income stream for the next 30 years, which largely ensures you never run out of money. For conservative types or those who can’t suppress their spending urges, this may offer some peace of mind.
Cons: But there are risks. It’s possible that the entity making the payout over the 30 years could run out of money. You also could die before enjoying all your winnings. Tax rates, which currently are the lowest in decades for the top tax brackets, also could increase over the next 30 years, and more of your winnings then would go to Uncle Sam rather than into your pocket.
There is also the issue of estate taxes, says Leon LaBrecque, chief growth officer of Sequoia Financial Group. If you pass away before all installments are paid, your estate with undistributed installments would be taxed at 40% of anything above $11.58 million if you're single, or $23.16 million if you're married. “The estate would have to pay the estate taxes, even though the installments haven't arrived,” he said.
LUMP SUM: Winners can accept a one-time cash payout. In the case of the $202 million jackpot, the winner could take $142.2 million in cash.
Pros: Taxes favor taking the lump sum because rates are so low right now. In 25 years, who knows? Financial pros also point out that with a smart investment strategy, you could make more money off the lump sum than the eventual full payout of $202 million. The key is to calculate how much you plan to spend immediately from the cash payout before making any calculations.
“To invest better you need to not only choose a good, low-cost, diversified portfolio,” says Charles Weeks, founding partner of Barrister, “but you will also need to make sure you control your emotions in good markets and bad.”
Cons: The main concern is that winners with little self-control could fritter away their winnings, especially as family, friends and charities look for handouts. There are plenty of stories of celebrities, professional athletes and other lottery winners who have squandered their newfound wealth and ended up in bankruptcy court.
But the sheer size of this jackpot makes it hard for even the most ambitious spendthrift to blow all their winnings.
“It’s all about scale. If it’s a smaller amount, the risk is proportionally higher,” says Douglas Boneparth, president of Bone Fide Wealth in New York.
But you can still make a lot of mistakes with $202 million and still come out ahead.
The verdict? Take the lump sum.
Contributing: John Connolly, NorthJersey.com
This story was originally published on March 21, 2019.
This article originally appeared on USA TODAY: Winning the lottery: Take the lump sum or the annual payments?