Which is better: Taking the Annuity or Lump Sum Cash payout of the xx lottery?
If you win the lottery, one of the first decisions you need to make is whether to receive a Lump Sum Cash Payout or the 30 year payment Annuity. Most players take the cash, which can be significantly lower than the annuity.
Rather than selecting either option emotionally, we are presenting this tool to help you make the best financial decision. This is done by evaluating both options side by side, comparing the amount of money you would receive after taxes. We deduct an amount for your living expenses spending, invest the remainder at an assumed rate of return, and deduct the taxes on your capital gain earning. This is repeated every year throughout the annuity period. Lastly, we compare the compounded ending values. The one which has the most amount of money is the best option.
As you will see, there is no clear cut answer for all scenerios. In times of very low interest rates, the Cash Option is typically best. This is because you can invest your winnings (lets say in a 60-40 Target Date Fund) and earn an average return of 5% annually. You risk market fluctuations that can lead to losses, but over the long period, you should be okay. Comparitively, when interest rates are high, the cash option will be much lower than the Annuity. During those times, you should take the Annuity because you will have more money and will not have to worry about market risks.
This xx Jackpot Investment Calculator contains three tables below. The table T1 is the lottery information input screen. There, you can change the annuity and cash payouts, yield and ratio, as well as the federal and state tax rates. Once you enter your data and either move the cursor or hit return, the corresponding payout structure and tax summary tables will be updated automatically. The table on the left T3 illustrates each of the individual annuity cash payments. And, the table T2 on the bottom right shows the tax implications based on both federal and state rates.
The Mega Millions, Powerball, and Super Lotto Plus annuity payments are not constant. They increase a certain percentage each year to adjust for inflation.
However, the Lotto Texas payments are all the same. That is why the graph G2 shows straight lines for each payment.
Whether you take the Annuity or Cash is a matter of preference. Originally, we believed the Annuity is best. But, in very low interest rate environments (less than 2 percent), we now think taking Cash is best.