Before you pick out the new mansion, yacht and private jet, as a lottery-jackpot winner, you must tell the game officials whether you want to receive an immediate lump-sum payment or an annual distribution -- the lotto annuity -- for the next 25 to 30 years. Financial pundits tend to prefer the single payout, and with good reason. But the annuity has its merits, too. The best move is to consult a financial adviser before claiming your prize.
When lottery officials announce the Mega Millions jackpot is $300 million, in fact, they have about half of that on hand to give away. The remaining balance of the promised winnings comes from a bond the game operators buy. The certificate has the same value as the announced prize, but it yields earnings slowly, taking around 25 years to finally pay out the total jackpot. That is why you walk away with less than the publicized cash if you don't choose the annuity as your form of payment.
In an interview posted on Bankrate.com, Craig Wallace, a funding officer whose employer makes a profit selling lottery operators long-term annuities, is surprisingly honest when he recommends that jackpot winners take the lump sum. Wallace says that the annuity distributes fixed payments -- albeit very large ones -- over 20 to 30 years, a period too long in his opinion to trust the money will retain its value. Besides, during that time, the income-tax rate could change, reducing your payments by a larger chunk, he says. For the sake of full disclosure, the annuity payments are fixed over 12-month periods, but they increase from year to year until the full jackpot minus taxes is paid.
The annuity is a guarantee of income over a long period of time. It also keeps a significant portion of your winnings safe from large impulse purchases, bad investments and doomed-to-fail business ideas, all of which can turn you into a pauper in debt. To figure out whether the lump sum or the annuity is the best option for you, you need to be willing to take an honest look at the type of person you are -- a compulsive spender or one with self-restraint. You should also get the advice of a professional who understands how to manage a large amount of cash.
Phil Friedland, a Delray Beach, Florida, certified public account and financial planner, suggests that jackpot winners set up separate appointments with two to three CPA/financial planners. The advisers should be able to provide the names and contact information of several people whom they counsel or have counseled for a professional background check. Besides, Friedland recommends that lotto winners ask prospective money managers how many financial plans they have prepared and how they are paid. A planner who charges an hourly fee instead of a percentage of someone’s portfolio may be a safer fit. In addition, save the handshakes for courteous greetings and get all the terms of the arrangement in writing and signed by both parties.
Emma Watkins writes on finance, fitness and gardening. Her articles and essays have appeared in "Writer's Digest," "The Writer," "From House to Home," "Big Apple Parent" and other online and print venues. Watkins holds a Master of Arts in psychology.