Q&A – Lottery Winnings – What's Better, A Lump Sum Payout or An Annuity?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station page in the iHeart app.
Today’s entry: Good day Brian. Would love to hear your analytical genius on lottery winnings. Lump sum or annuity? Does it depend on the jackpot amount? Are the winnings willable if the owner perishes? My wife and I have some useless, tense conversations about this. Enjoy listening to you and Joel. Thank you.
Bottom Line: I’ll start with the best answer that I could possibly provide. Your wife is right. Beyond that...let’s dig in a bit into what’s long been a fun thought and topic of debate for lottery players...to take the lump sum payout or not to take the lump sum payout?
In attempting to determine what might make the most sense for you in the event you were found to be in this 1 in 292 million situation (the current odds of winning a Powerball jackpot), it is important to have all of the information in hand to make an informed decision. In answer to your question about annuities and whether they’re able to be transferred through a will or trust...? The answer is yes.
In Florida, lottery annuities are transferable through a will. The Florida Lottery allows annuity payments from games like Powerball, Mega Millions, or Florida Lotto to be passed to the winner’s estate or beneficiaries upon their death. The remaining payments are treated as an asset of the estate and can be inherited by heirs as designated in a will or through probate if no will exists. Florida law does not impose specific restrictions on transferring lottery annuity payments to heirs, and the Florida Lottery will continue making payments to the designated beneficiary or estate.
However, there are a few key considerations:
- Estate Taxes: The value of the remaining annuity payments may be subject to federal estate taxes, depending on the estate’s size and federal tax thresholds
- Lottery Rules: The Florida Lottery requires notification of the winner’s death and needs legal documentation to redirect payments to the estate or beneficiary
- Trusts or Beneficiary Designations: Setting up a trust or designating a beneficiary directly with the Florida Lottery can simplify the transfer process and potentially avoid probate
Now for the fun stuff. I’m going to break this down using Saturday’s Powerball Jackpot which is estimated at $1.7 billion – which thanks to Uncle Sam is a $1.7 billion payout in name only. If you were to take the lump sum payout after taxes your net would be $485,324,573 (or less than 30% of what the big number is purported to be). Now, if you were to take the annuity payouts the total to be distributed would be $1,072,067,191 paid in 30 installments across 29 years. Notably the total annuity payment factors in a 5% increase annually to account for inflation and other factors. From an analytical perspective this is where the rubber meets the road.
The average annual rate of return with the S&P 500 is 10.1%. If one was to take almost all the proceeds from the lump sum and invest them at standard stock market returns, the total after 29 years would be about $8.5 billion. If one were to take the annuity payments and invest those as they came in the S&P 500 at average rates of return the total after 29 years would be about $6 billion.
Of course, there are no guarantees that the stock market will provide future returns at historic rates of return, but regardless, the point is established. The hands down no-brainer response from sheerly an analytical perspective is to take the lump sum. As much as anything this exercise helps to illustrate the power of compound interest.
Btw, I’m pretty sure most people who take the lump sum aren’t doing it through the analytical exercise of investing almost all the money over 29 years and compounding the rate of return, however, most do make that decision. 93% of lottery winners opt for lump sum payouts over annuities.
So, there you go. As always there are two sides to stories and one side to facts. Those are the facts...unless they contradict what your wife is saying in which case – she’s right.