You just won the lottery jackpot $100,000,000! Most of us dream of this happening and imagine all the fabulous things we would buy and do.
But first you must decide how to receive the money, no doubt a perplexing decision for many winners. The rest of us see them on TV gleefully accepting & displaying the “big check” with their smiling advisers looking on.
It should go without saying winning a big sum is an emotional experience with a decision to make soon. This decision comes down to “Cash Option” or “Annuity” with no in between choice allowed by the lottery.
The government assesses taxes at the rate of 7.75% Wisconsin state tax and 25% Federal tax making the total tax 32.75% which is deducted/withheld from your winnings immediately.
Cash Option – Winner receives about 50% of the advertised jackpot amount. In our $100 million example that leaves the winner with $50 million to subtract taxes from. The net jackpot after taxes is $33 million; not too bad.
Annuity – Wisconsin Megabucks winner receives the full advertised jackpot $100 million in 25 annual installments. In our $100 million example the winner gets $4,000,000 per year minus current taxes, nets $2.7 million per year for 25 years. Nice yearly paycheck.
The annuity option pays out twice as much, $67,250,000 after tax, this is the equivalent of earning a guaranteed 8.6% rate of return per year.
Yet nearly every winner picks the cash option. Unless they are going to spend all the winnings right away; and if that’s what they want to do – I hope they enjoy their moment.
If on the other hand they want the moment to be larger and last a lot longer; the annuity is the way to go. Later if there is a change of heart all or part of the annuity’s future annual payments can be sold to investors for lump sums. Savvy investors recognize the value of annuity payments solid investments. In today’s market enviroment an 8.4% guaranteed rate of return is a very good.
It is unfortunate some advisers steer their clients away from annuities. They either do not understand how annuities operate to achieve high returns for clients. Or perhaps the reason is once an annuity is setup there are no ongoing fees or commissions paid to representatives.
My advice – If you win the big jackpot don’t settle for the one time “small” payout. Take the big payout over time with the annuity option. After a year or so when your emotions settle down. You can think logically and clearly again, you can change your mind and sell all or parts of the annuity payments for that upfront cash.
You may ask questions in the comments or contact me privately Tim Barton, ChFC