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Lottery Winners’ Choice – Lump Sum Or Annuity

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The odds of winning the lottery are incredibly long, but some people do defy those odds and hit it big. Those lucky few, known as “lottery winners,” must face some tough choices if they want to keep their millions of dollars. Among the most significant is how they will receive their prize money. Most lotteries offer jackpot winners the choice of a lump sum payout or an annuity that spreads payments over 20 or 30 years. While a lump sum can seem attractive, it may be more financially sound to take the annuity. This article will explore some of the pros and cons of each option, and provide some tips to help jackpot winners make their decision.

Super-sized jackpots drive lottery sales, and they earn the games billions in free publicity on news sites and newscasts. But these massive pots also drain government receipts that could otherwise go to things like retirement and college tuition. Plus, purchasing a lottery ticket sucks up thousands of dollars in foregone savings that could have gone to investments that would actually grow your wealth over time.

It seems like jackpots topping $1 billion are becoming more common these days, but there is a reason for that. For one thing, higher interest rates mean that a lump sum paid through an annuity over decades will grow larger than advertised. The other factor is that lottery officials change the odds of winning the top prize to make it harder, so that prizes have a greater tendency to roll over and grow even bigger.

When a jackpot is advertised, it’s important to understand how the prize pool is calculated. For example, when Powerball advertises a $1.765 billion prize, that sum doesn’t actually exist in a vault ready to be handed over to the winner. Instead, the jackpot is calculated based on how much money you’d get if the current prize pool were invested in an annuity for three decades. This means you’d get a first payment when you win, followed by 29 annual payments that increase by 5% each year. If you die before all the payments are made, the balance would go to your estate.

If you do happen to win the lottery, Lustig recommends assembling a team of professionals, including an attorney, accountant and financial planner, who can help you weigh your options and plan for the future. She also suggests putting any extra cash into safe investments such as real estate, stocks and index funds that can help you preserve and even grow your wealth over time. Most importantly, you must be careful not to spend your windfall all at once. The unfortunate truth is that a majority of lottery winners end up broke not long after hitting it big. That’s why it’s so important to have a solid financial plan and stick to it. The more you follow these simple strategies, the better your chances of being among the lucky few who don’t go broke after hitting it big.

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