If you ever win the lottery in the future, you may have to make a big decision. The big decision I'm discussing is the choice of whether to take the prize as a lot annuity or a lump-sum payment. Which is a better option to choose? Read on for the answer.
There are many factors that should go into your decision. For example, are there a lot of big purchases that you want to make immediately? If so, the lump-sum would be a better option. For most people, though, the decision will be based on which option will provide for the most money over their lifetime. For that, you would need to calculate the net present value of the money.
The scope of this article does not go into how to calculate net present value. That is better left to an accountant. However, I could confidently tell you that, in almost all cases, taking a lump-sum payment is better than taking a lottery annuity. That's because you could almost always get a better interest rate if you set up an annuity on your own through a financial services or life insurance company. That would make the net present value of a lump-sum payment worth more.
For example, if you win a $ 20 million Powerball lottery jackpot, you would have the option of a 30-year lottery annuity or a lump-sum payment of $ 10.2 million. This means that they would be using an interest rate of approximately 2.25%. If you take the $ 10.2 million and set up an annuity on your own by getting the best rate that you could find in the market, you would have more than $ 20 million in payments over 30 years. In fact, you should easily be able to find an annuity rate of more than 5%, twice the amount of the Powerball rate.
Of course, taxes should also be considered when making your decision on how to take your lottery payment. Taxes, as well, are beyond the scope of this article and should be discussed with a professional.