Which is Better: The Lump Sum or Annuity Powerball Pay Out?
One of the key features of the US Powerball jackpot is a choice on how to collect winnings. They may choose to a one-off lump sum, or they opt for an annuity. The former is self-explanatory; you simply take the prize money as a single payment. The annuity divides the jackpot prize into 30 annual pay outs, calculating an adjusted total value of the top prize. There are benefits and advantages to each type.
The Lump Sum Pay Out
- The first major advantage to the Powerball lump sum is that you get all the money at once and can start earning interest when banked. If you’re careful, you can live a lavish lifestyle on the interest earnings alone
- Having a large pot of cash from the start can help some people understand how much they have to spend, to live on, and to budget. Winners choose this option because they would rather not rely on waiting until next year to receive the next down payment.
Most jackpot winners choose the lump sum, yet there are downsides:
- Players who opt for the lump sum pay out more in tax. Powerball lottery winnings are treated as income and taxed as such. The higher the prize, the higher the tax rate. Winners typically lose around 40% of their winnings when opting for a single lump sum pay out.
- There is also the risk of spending all the money at once; when it’s gone, it’s gone. Bankruptcy is surprisingly high among lottery jackpot winners and the most-cited reason is the inability to properly manage the winnings.
The Powerball Jackpot Annuity
The upsides of spreading the winnings include:
- The main advantage to the Powerball annuity is that it encourages the winner to manage their money as they would a salary. It’s guaranteed income year on year. Players are more likely to make the money last when they do not have immediate access to all of it.
- The second bonus is the tax advantage. As it’s treated as an income, taxes are lower because the annual pay-out is lower. Couple that with the guaranteed income and it makes for a genuine tax saving in the long-run.
There are, of course, several downsides:
- While the tax advantage to a Powerball annuity is certainly attractive, winners tend to choose the lump sum because they have more money to invest and help their wealth grow. With lower pay outs comes lower earnings on interest and dividends on investment if inclined to spend money that way
- 30 years is a long time. Technically, anyone over the age of 50 may not live long enough to enjoy the final pay out 30 years from now. If they are still alive, there is a high chance that they are unlikely to be in good enough health to enjoy the income. It will, however, go into the estate
There is no correct answer on whether to choose a Powerball lump sum or annuity. It depends on the individual, their personality, and what they intend to do with the money.