Benefits for Lottery Winners of Choosing Annuity Over Lump Sum
Every few months, the United States goes through Power Ball Fever, where the dreamers stand in line to be the one who wins the jackpot. The choice many winners make is taking the lump sum instead of the lifetime payout. People win, take the lump sum, and then file bankruptcy a few years later.
Annuity Lottery Payments Protect Assets From Others
When someone wins the lottery and takes a lump sum, it's tempting to help out "family and friends" who come knocking. That’s how the march to bankruptcy begins. When you take the annuity lifetime income stream instead of the lump sum, you are establishing boundaries because your resources are limited. People may show up at your door every year for the rest of your life when the annuity payment is scheduled, but at least you're less likely to make the generosity impulse mistakes you can't afford.
In addition, the publicity surrounding winners of big jackpots makes them more vulnerable to scammers trying to steal their money.
According to a study in the Journal of Gambling Behavior, lottery winners generally don't go on crazy spending sprees. The research found that 33% of lottery winners gave money to their children, 17% of winners gave money to their relatives, and 10% gave large sums to charities or churches.
Annuity Payments Are Contractually Guaranteed
The lifetime income stream is a prudent choice because it is contractually guaranteed. In many cases, you have the option to set up the payments so—if you die—they continue for the lifetime of your spouse, or for a “period certain” that is much longer than your life expectancy. Guarantees are always good, but contractual guarantees are better. Contractual lifetime income guarantees are the best. In a survey by Gallup, 31% of Americans said they would stop working if they won a $10 million lottery prize. Taking an annuity allows for a concrete plan based on actual income expectations.
Choosing a lifetime income stream over a lump sum certainly “handcuffs” your family and friends. It also handcuffs the lottery winner and protects them from their own poor choices. Your real family will thank you for it.
Financial Advisers Will Push the Lump Sum
Common wisdom from financial pundits, planners, and stock market experts is that you should always take the lump sum if you win the lottery. The argument is that choosing an annuity lifetime income stream will never beat a well-planned asset-allocated portfolio. In theory, that is true, but life is rarely lived “in theory.” It takes discipline to invest a lump sum and keep it there.
Nearly one-third of lottery winners eventually declare bankruptcy and are more likely to declare bankruptcy within three-to-five years than the average American, reports the Consumer Financial Protection Bureau.
One focused study of Florida lottery jackpot winners reported in The Review of Economics and Statistics found that a whopping 70% had spent their entire winnings within five years, and 1% went bankrupt each year.
Still, the Journal of Gambling Behavior reported 37% of the winners in its study invested in stocks, bonds, or real estate, while 17% used the money to pay off debts.