Every few months, the United States goes through Powerball Fever, where the dreamers stand in line to be the one who wins the jackpot. The choice that many winners make is to take the lump sum instead of the lifetime payout. However, people win, take the lump sum, and then file bankruptcy a few years later.
- When you take the annuity lifetime income stream instead of the lump sum, you may be less likely to give away more than you can afford to friends or family.
- You can often set up annual payments so that if you die, they continue for the lifetime of your spouse or for a “period certain” that is longer than your life expectancy.
- Common wisdom from financial planners is that you should take the lump sum, but it takes discipline to invest a large sum and keep it there.
Annuity Lottery Payments Protect Assets from Others
When someone wins the lottery and takes a lump sum, it's tempting for them 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'll be less likely to make the generosity-impulse mistakes you can't afford.
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% 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 that if you die, they will 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 were to win a $10 million lottery prize. Taking an annuity allows for a concrete plan based on actual income expectations.
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.
One focused study of Florida lottery jackpot winners reported in The Review of Economics and Statistics found that 1% went bankrupt each year.
Still, the Journal of Gambling Behavior reported that 37% of the winners in its study invested in stocks, bonds, or real estate, while 17% used the money to pay off debts.