If you’re one of the lucky few players, who has won a big lottery jackpot, possible from the Mi lottery, a state lottery which allows winners to choose between a one-time lump sum payment or an annuity payment on big jackpots.
There is one very important decision you might have to make. How to receive your winnings. A lottery annuity or cash option?
It may look like an easy decision, but there are a number of factors to consider when choosing one option over the other. Should I take the annuity payment or the lump sum? Most jackpot winners are torn as each option has major life-changing pros and cons.
Here, we are going to zero in on the lump sum payment option.
Lump Sum Generally Explained
The lump-sum is a single cash transfer paid all at once in one single payment by the lottery operator to the prize winner. The prize winner has immediate access to the winnings. Normally the cash option amount is shown as the second payout option. It is slightly more than half of the advertised jackpot amount.
Why Is Lump Sum Smaller Than Advertised Jackpot?
Modern lotteries, you see, involve a bit of financial sleight of hand. The lump sum value is the current worth of an advertised jackpot prize twenty-nine – thirty-years later. It is precisely equal to the series of payments usually 29 or 30 annual payments based on a certain interest rate (usually 3 to 4%).
Meaning, if you were to deposit the lump sum money today into an interest generating savings account. With an assumed annual bearing interest of about 4% per annum for a period of the 30 years.
The money would grow to be equal to the advertised jackpot prize. The advertised jackpot value is the amount on the billboards – e.g “this week’s jackpot is $X million.”
In Michigan state lottery, the cash value is roughly 58% of the advertised jackpot prize. “You’ve won $xx million”. Actually, translates to, you’ll receive that much if you’re willing to wait 29 to 30 years to collect it.
What you’ve actually won is the cash value. That includes the potential interest that the cash value will have to accumulate in about 30 years if you choose to invest the prize with the lottery.
Compared to the Annuity
Lump sums are popular options because they allow for flexibility, including immediate access to winnings and the opportunity to invest in subaccounts and other financial tools.
This, however, is favorable assuming you don’t blow most of the money quickly. But you invest at least a big chunk of it instead.
Yet, this financial payout option can lead to extravagant spending habits and uninformed investing. Choosing a lump sum also means winners will receive an amount significantly lower than the initial value because the highest taxes will also be due in a lump sum. All of which can be avoided by taking an annuity.
Bottom Line
If you choose the lump sum rather than the extended payout, you will get much less money than the advertised jackpot value. But that amount is equal to the advertised jackpot prize if you were to invest the cash lump sum at about 4% annual interest over about 30 years.
Generally, the lump sum option is slightly more than half of the advertised jackpot value.
For example, if you won a $120 million jackpot in the multistate Mega Millions lottery game, you could take $4,615,380 a year for 26 years to total the entire $120 million. However, the lump sum alternative is $70,042,000, equal to about 58 percent of $120 million.
