Winning the lottery might just be the most amazing thing that ever happens to you. The saying goes, “you have to play to win!” So, what happens when you play and you DO win? First of all, congratulations to you! Once you overcome the rush of emotions and excitement, you might find yourself freaking out when the adrenaline stops pumping. While we all want to be the lucky winner at the receiving end of all that money, many lottery winners make a lot of mistakes once they collect their winnings.
Winning the lottery should remain the best thing that ever happened to you. If you started your day as a normal person and ended it as a big winner, your life will certainly change forever. We want to make sure it stays changed for the positive. If you’ve just won, it’s important to slow down and think about what you’re going to do before you collect your winnings. It’s important to realize that there are many legal, tax, and financial decision you need to consider. Here’s all you need to know about winning the lottery the right way.
Your First Major Decision
The first major decision you need to consider if you just realize you’ve won the lottery is whether to take the lump sum or an annuity. There are differences, advantages, and disadvantages to each decision. To start, you get a single cash transfer when you choose the lump sum. When you choose an annuity, payments are split into a serious of annual transfers. Given the choice, most lottery winners take the lump sum. The main advantage to this is that you get all the money at once, immediately.
Keep in mind that there may be disadvantages to having complete access to all your lottery winnings. Before you make that decision, it’s important you sit down with a financial advisor or accountant and discuss your options. There may be several reasons why you should choose an annuity. Let’s take a closer look.
Disadvantages to Taking the Lump Sum When You Win the Lottery
For most winners, there are several disadvantages to taking the lump sum. These include:1. You Pay Higher Taxes on the Lump Sum
If your lottery prize is less than ten million dollars, you may be in a better position to choose an annuity when it comes to your taxes. Of course, lottery winnings are subject to taxes. They are considered income. So, if you take the lump sum, that tax payment is determined based on the year you receive the money. This means the entire amount is subject to income tax in that one year.
If you choose the annuity option, income tax payments can span several decades. For example, you may receive $100,000 a year with annual annuity payments. That means only the $100,000 is subject to income tax each year. Since income tax brackets determine how much you pay, you might be better off when you set yourself up in lower income tax bracket.
2. You Save Yourself from Splurging
Unfortunately, some people make poor spending decisions when they choose the lump sum option. Let’s face it, some people are just prone to spending. Even the best advice from advisors and consultants can’t help this problem. Add in family pressure, and the fact that everyone knows you have a little extra money to go around and you’re in a tough bind.
When you take annuity payments it’s somewhat of a fool-proof money management system. This helps keep you from blowing all your money in one place. Less access to the full amount is often a great choice to make your money last. Instead of having to manage millions of dollars and suddenly realizing that you spent it all, you may have an easier time managing small amounts. You’ll also rest easy knowing that you have more money coming in once the new year hits.
3. You Most Likely Won’t Get a Winning Do-Over
One of the biggest disadvantages to taking the lump sum is that if you make a mistake, you probably aren’t going to be in a position to win that amount of money again. Winning the lottery is most commonly a once in a lifetime opportunity that isn’t awarded to a great number of people. So, consider yourself lucky! While you might want to get all your money in your hand, choosing annuity payments gives you the option to do-over if you mismanage your money.
Even if you do a terrible job navigating your new way of life with all that money, annuity payments mean you can do better next year. This is one of the best advantages to an annuity. While it’s difficult to convince most winners to slow down and take the lower payments, it’s important to look at the big picture. When you spread your winnings out over time, you can manage your assets better. After the first year, you’ll quickly see why there are many advantages to choosing an annuity.
What’s the Right Decision for Me?
Of course, every winner is unique. So, how can you tell which is the right decision for you? While choosing an annuity isn’t as appealing as taking the lump sum, consider this point. Many lottery winners regret their money management decisions when they realize they’ve spent more than they wanted. When you take the lump sum, you run the risk of spending frivolously and ending up in a financial bind.
But, not many winners complain about knowing there is a large check coming in the mail every year, religiously. Before you make a decision, sit down with a financial consultant that you trust. Keep in mind that while there are only two options to take claim your winnings, your financial advisor can give you other ways to manage your money. For example, you can take advantage of a private fixed annuity if you take the lump sum. This doesn’t allow you to take advantage of spreading your income out over time to minimize taxes. But, it does help winners who are concerned with their ability to make the right financial decisions.
Private annuities can be set up so that you receive a fixed amount each year to cover your basic living expenses. You can sit down with your consultant to discuss what you need to bring home each year to cover your basic living expenses. This includes things like property taxes, insurance, food, clothing, medical, and the basic things you need to get by. Private annuities give you the peace of mind that you will have financial stability to cover the standard of living every year.
From a financial perspective, it’s difficult to answer the question of which option is better. Ultimately, it depends on several factors. You would have to consider the amount of money you won, your current income tax rates, your projects future income tax rates, the state you live when you win, any state you are considering moving to in the future, and how much you plan to withdraw from your portfolio each year. You should also consider the rate of return you will receive on your investments.
Your financial advisor can recommend a tax attorney and CPA to help determine what is the best overall choice for your current situation. If you won the lottery, congratulations! Just make sure you consider all your options before you make decisions when it comes to your winnings. Your future self will thank you!