Which Way Do You Want Your Casino Winnings – Lump Sum or Installments?

Winning a life-changing jackpot or the lottery is something the vast majority of people will never get to experience. It is an event that could set you up for life with even a modicum of sensibility.

It is a well-known and frequently-spread fact that there is a higher chance an individual will be struck by lightning than win the lottery or jackpot. However, those that do get lucky enough to win such an enormous sum of money have an important and potentially life-altering decision ahead of them: should they receive their prize in the form of a lump sum or through annual installments?

The first thing to note is that the advertised jackpot is never fully paid out if taken in a lump sum. The amount you would receive from your jackpot win usually amounts close to 60% of the advertised sum, depending on the lottery/jackpot provider.

That is still a large amount of money, but when you consider the fact that you would be paid the advertised amount in full should you go the installments route, it leaves an important dilemma on your hands. Installments are usually paid out over the course of 30 years, on a yearly basis.

Before I get into the nitty-gritty, I can immediately say that there is no right answer to this question, as it would largely depend on the type of person you are and what you plan to do with your money. Nonetheless, I will present the pros and cons of both so you can make an informed decision by yourself should the situation call for it.

Taking Payment in Annual Installments

It is well known that a lot of lucky jackpot winners fail to keep their winnings or make something out of them. Most of them have regrets for their reckless spending after blowing all their cash in only a few years.

You know yourself best; if you are prone to spending on impulse, then going for annual payments may be the smartest idea. However, let’s investigate the pros and cons in detail.

More Money

I already mentioned how most casinos and state lotteries will cut your winnings by a significant amount if you decide to take a lump sum payment. The payment cut usually amounts to 40% of your winnings. However, as this does not apply to installment payments, you would receive more money in the long run.

Financial Security

Getting paid in installments could potentially settle your financial woes for the foreseeable future. Unless you are really reckless with your spending, you could be set for your life with your big check arriving in the mail on a yearly basis.

Even if you are someone who likes to frequently indulge himself with various pleasantries, you could still get away with it, as a potential $600,000 for doing absolutely nothing leaves you with plenty of room for financial maneuvering even after you’ve taken care of all your essentials (house, bills, car, insurance, etc.).

The aspect of financial security changes if we’re talking about a smaller prize amount. Say you’ve won a $1,000,000 jackpot rather than $30,000,000; then your yearly installments would amount to $33,000. You can certainly spend and invest with $600,000 coming in each year, but it would be a no-brainer to take a lump sum on relatively smaller jackpot prizes.

Inflation

30 years is a long time; nobody can possibly predict what will happen to the financial market throughout all those years. The dollar may drastically drop in value, leaving you with vastly less purchasing power in the future, even with your massive annual payments.

Some operators adjust for inflation and increase the annual installments by 3%-4% each year, off-setting the risk of losing a good chunk of your money to inflation. However, in case your payments aren’t adjusted for inflation, your money’s value could be halved in 20 years with an assumed 4% inflation rate.

Taking a Lump Sum Payment

The lump sum payment is what most people go for. It is almost instinctual to want to receive all of your money immediately, leaving you with enormous spending power and the ability to do almost anything you want at any given moment.

Investing

Most people know little about investing, and odds are that the next lottery winner will be the same, but this does not mean you should simply dismiss the greatest advantage of having such a large amount of cash at your disposal.

We all know investing can be risky, but not all types of investments are like that.

However, as I’m not a financial expert myself, there are plenty who specialize in this profession, and with the money from your lottery winnings, you can certainly find a reputable financial advisor that can help you make something of your money. Not only an advisor, but an accountant as well, and if you want to really err on the safe side, you could hire a team that would audit the work of your advisor and accountant. My point is that it’s much easier to make money when you begin with a large amount of it already.

You don’t have to be the next wolf of wall street, either. Even a sensible and realistic yearly return of 3% to 5% on your winnings would make it worthwhile for you to take in a lump sum payment.

Spending Power

The other benefit of taking in a lump sum is fairly obvious: with a lot of money, you have a lot of spending power. If you need a new house, car, or whatever else it may be, you can buy it immediately. Want to start a business? No need to wait for years to accumulate money from your installments.

Although this is one of the ways many lottery winners have quickly gone broke. Buying a new house and a car is easy, but if you are not careful and you spend your lump sum quickly, soon you will not even be able to afford to maintain your car, pay your house taxes, mortgage, and so on. It’s a tricky line to tread, which is why this decision ultimately depends on the type of person you are.

Although by having all the money to yourself immediately, you can easily recreate the installment scenario by yourself if you invest in a mutual fund. This could net you a reasonable yearly return if you don’t really want to bother with investing.

Lump Sum vs. Installments – The Question of Taxes

Taxes are an important segment of every individual’s life, and it’s worth knowing that you would be taxed differently depending on the type of payment you go for.

Winning a $30,000,000 jackpot would put you in the top bracket of earners, thus subjecting you to the maximum tax percentage (39.6%). We already know that you can say goodbye to about 40% of your winnings if you take a lump sum, meaning you would be taxed 39.6% on your $18,000,000, leaving you with approximately $10,800,000 once all is said and done. That’s about 30% of the original advertised sum. Similarly, Jack Whittaker, a Powerball winner in 2002, was left with about $114m in a lump sum payment (after paying taxes) on his $314.9m multi-state lottery win.

Going the installments route via annual payments, you would have to pay taxes on your winnings on a yearly basis, just like you would with regular income. However, as you wouldn’t have a fair share of your prize cut at the get go, the overall amount you receive would ultimately be higher. Your annual payment on a $30,000,000 jackpot would be $1,000,000. If taxed at a rate of 39.6%, you would have received a total of $18,000,000 over the course of 30 years – significantly more than your lump sum payment.

Conclusion

I said multiple times that impulse spenders should steer clear of taking in a lump sum at the risk of going broke in a few years, but if you are a sensible spender – or even better, a good investor – that lump sum can turn into an even bigger fortune down the road. Either way, winning the jackpot should set you for life regardless of how you choose to receive your winnings.