The Powerball jackpot grew even richer after no ticket won the $550 million lottery on Wednesday night.
No one has scored the Powerball jackpot since December, creating a mania around the ever-expanding prize.
If someone wins the $625 million jackpot on Saturday night – the next scheduled drawing – they are faced with enviable decision of choosing either the cash lump sum of $380.6 million before taxes or 30 annuity payments.
But is one better than the other financially? Let’s break it down:
ANNUITY: The installments are paid out as one immediate payment followed by 29 annual payments. Each payment is 5 percent larger than the prior one.
Pros: The biggest allure of the annuity for any winning or windfall is having a guaranteed income stream for the next 30 years, which largely insures you never run out of money. For conservative types or those who can’t suppress their spending urges, this may offer some peace of mind.
Cons: But there are risks. It’s possible that the entity making the payout over the 30 years could run out of money. You also could die before enjoying all your winnings. Tax rates, which currently are the lowest in decades for the top tax brackets, also could increase over the next 30 years, and more of your winnings then would go to Uncle Sam rather than into your pocket.
There is also the issue of estate taxes on, says Leon LaBrecque, managing partner of LJPR Financial Advisors. If you pass away before all installments are paid, your estate with undistributed installments would be taxed at 40 percent of anything above $22 million. “The estate would have to pay the estate taxes, even though the installments haven’t arrived,” he said.
LUMP SUM: The one-time cash payout is $380.6 million. The advertised $625 million jackpot is the total after the annuity is paid out.
Pros: Taxes favor taking the lump sum because rates are so low right now. In 25 years, who knows? Financial pros also point out that with a smart investment strategy, you could make more money off the lump sum than the eventual full payout of $625 million. The key is to calculate how much you plan to spend immediately from the cash payout before making any calculations.
“To invest better you need to not only choose a good, low-cost, diversified portfolio,” says Charles Weeks, founder of Barrister Wealth Management, LLC. “But you will also need to make sure you control your emotions in good markets and bad.”
Cons: The main concern is that winners with little self-control could spend away their winnings, especially as family, friends and charities look for handouts. There are plenty of stories of celebrities, professional athletes and other lottery winners who have squandered their newfound wealth and ended up in bankruptcy court.
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But the sheer size of this jackpot makes it hard for even the most ambitious spendthrift to blow all their winnings.
“It’s all about scale. If it’s a smaller amount, the risk is proportionally higher,” says Douglas Boneparth, president of Bone Fide Wealth in New York. But you can still make a lot of mistakes with $625 million and still come out ahead.
The verdict? Take the lump sum.
Usually, three times is the charm but for one lucky lotto winner, all it took was one! Buzz60’s Mercer Morrison has the story.
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