Powerball Lump Sum or Powerball Annuity - Which Is Best?

It’s a problem we’d all like to have: we’ve won a huge lottery jackpot, now what? Is it better to take the lump sum cash payment or the annuity paid out over 25 to 30 years? The answer is a resounding, ‘it depends.’ It depends on your health, on how well you trust yourself not to blow it, on who might come around asking for a little help, on what you plan on doing with the money. There are considerable pluses and minuses to both options and many questions to ask before a decision is made.

What Are the Taxes on US$20 Million Dollars in Lottery Winnings?

A quick note: we will not be discussing taxes. Why? Because, taxes vary from one location to another that it’s not really possible to cover all the different scenarios. Plus, taxes aren’t fun. Taxes are the story of the hand that’s going to dip into your pocket and take your winnings. One quick point: the two largest lotteries that offer annuity payments are US Powerball and Mega Millions, and regardless which payment option a player chooses, their lottery winnings are subject to a US federal tax of 30% in addition to possible state and municipal taxes depending on where the winning ticket was purchased. It’s depressing to think about how high your taxes on 20 million dollars will be, and how little of Powerball after taxes will remain, so let’s move on.

How Are Jackpots Calculated?

Have you ever noticed that sometimes the American lottery jackpots are quoted with another figure called ‘cash value?’ A US$20 million jackpot has a Powerball cash value of, usually, somewhere around US$13.6 million. What’s the difference, what do these numbers mean? Powerball's estimated US$20 million* starting jackpot is the amount that a winner will receive if they take the annuity option and receive 30 payments made over 29 years. US$20 million is basically the value of the cash prize plus the interest that will accrue over 30 years.

*Officially, the advertised jackpot is determined by game sales and interest rates, and it is announced prior to each draw.

Investing Your Powerball Payout - Will You Come Out Ahead?

One way to decide whether to take the Powerball lump sum or Powerball annuity payments is to ask whether you can make better investments with the lump sum than the lottery can. Let’s say you’ve won a US$20 million Powerball jackpot with a cash value of US$13.6 million, nice round numbers that are entirely possible. We know that the US$20 million figure is actually the value of the cash lump sum, US$13.6million, after it’s been invested and earns interest for 29 years.

So, can you do better? If you take the US$13.6 million cash payment and invest it yourself for 29 years could you end up with more than US$20 million? It’s entirely possible. If you paid yourself US$1 million per year, because you need to live off something, you’d need a return of between 5% to 6% per year to end up with more than US$20 million after 29 years. While such returns are possible without too much risk, at the end of the day, there is no way to absolutely guarantee a return of 5% to 6% per year, or even positive returns for that matter.

Typically, lotteries that offer an annuity option like Mega Millions and US Powerball buy bonds that they use to fund annuity payments to winners. However, it’s important to note that the lottery is on the hook for any losses to the investment, the winner will receive their annuity regardless of what happens to the bonds.

Powerball Annuity - Will It Set You Up for Life?

You can’t beat the Grim Reaper. The real question is how long you’ve got to enjoy your lottery lump sum or annuity winnings. If you’re young and in good health the annuity option will pretty much set you up financially for life. Using our US$20 million jackpot example you would receive, after federal taxes, US$451,543 for your first of thirty payments. Your thirtieth payment would be US$1,858,612 after federal taxes. That’s a pretty nice revenue stream to have coming in every year without having to spend a moment at work. Contrary to popular belief, if your time comes before the annuity payments have finished, they will still be paid to your estate. However, if you’re concerned that you won’t be able to enjoy your earthly treasure for very long, it may be better to take the lump sum and go a little crazy, because, why not? You just won the lottery, right? Important note: we do not recommend going crazy if you are lucky enough to win a huge lottery jackpot, but rather that you should consult with financial advisors so that you can deal with your winnings intelligently.)

Powerball Cash Value - When Everyone Wants a Piece of It

It’s no secret that lotto winners are sometimes besieged by friends, relatives, hangers-on, their wives’ cousins’ best friends’ neighbors’ former bridge partner, or whomever, all looking for a handout. It can be staggering the amount of people that come out of the woodwork looking for a little piece of your good fortune. Whether they are looking to you to make an investment to get their business off the ground, or whether it’s a bit of money to treat an ill relative, it can be incredibly difficult to say no. But, if you’ve opted for the annuity then you haven’t got millions of dollars sitting in a bank account and you won’t feel as much pressure to indulge everyone that comes around asking for money. Also, people may feel less entitled or emboldened to ask for something if they know that you’re not sitting on a pile of cash but rather a steady stream of it.

Powerball Lump Sum or Annuity - Decision Time

Of course winning the lottery will remain a dream if you don’t take a chance on making it happen. And if you play the game, there is no secret to winning the lottery. There are huge and exciting jackpots the world over simply waiting for someone to come along and claim them, so why can’t it be you? If you’re ready to take a chance on making your dreams a reality, buy lottery tickets to the world’s biggest draws today!