Q&A – Lottery Winnings – What's Better, A Lump Sum Payout or An Annuity?

Let’s dig in a bit into what’s long been a fun thought and topic of debate for lottery players...to take the lump sum payout or not to take the lump sum payout? 

Episode Transcript

Speaker 1 (00:04):
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Speaker 2 (00:08):
This is the Brian mud Show. Today's name lottery winnings?
What's better? Alum sum payout or an annuity? This brought
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(00:30):
love it if you would go into the app make
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your number two preset. While you're in there, look for
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lay down a message right there, maybe for future Q
and a today's notice. This good day, Brian would love
to hear your analytical genius on a lottery winnings, lumsum
or annuity? Does it depend on the jackpot amount? Are

(00:53):
the winnings willable if the owner perishes? My wife and
I have some useless tense converse about this. Enjoy listening
to you and Joel, thank you and so yes. This
has become a hot topic of conversation. In part because
of this, With.

Speaker 1 (01:12):
No big winner on Wednesday night, the jackpot continues to
grow and is now at least one point seven billion dollars,
making it the third biggest powerball jackpot of all time,
with a cash value of at least seven hundred and
seventy point three million dollars.

Speaker 2 (01:26):
Okay, so yeah, I'm gonna start with the best answer
that I can possibly provide. Your wife is right, Your
wife is right. Beyond that, let's dig in a bit
about what's been a fun thought topic over time that

(01:46):
people do like to debate and discuss and think about
a lot of replayers that will go should I take
the limpsum? Should I do it in the annuity? So
an attempting to determine what might make the most sense
for you in the event that you ever wore to
find yourself in this one in two hundred and ninety
two million situation. The current nods of winning the powerball jackpot,

(02:07):
it is important to have all the information to make
an informed decision and an answer to the question about
annuities and whether they're able to be transferred through a
will or trust. I'll take that piece first. Is the
more easy to answer. The answer is yes. In Florida,
lottery annuities are transferable through a will. The Florida Lottery

(02:28):
allows annuity payments from games like Powerball, Make Millions or
Florida Latto games to be passed to a winner's estate
or beneficiaries upon their death. The remaining payments are treated
as an asset of the estate and can be inherited
by errors and designated in a will or even through
probate if no will exists. Florida law does not impose

(02:51):
specific restrictions on transferring to lottery annuity payments to errs
and so the key and there is one here. I'll
tell you that few key considerations on this note. One
estate taxes, because the value of the remaining annuity payments
may be subject to federal estate taxes. You know what's

(03:11):
referred to as the death tax that can come into
play depending upon the estate size and federal tax thresholds
at any given time. You know, none of us know
exactly what tax law is going to look like in
twenty plus years. Right, lottery rules. So I mentioned that
you can will the lottery, but the Forida Lottery requires
notification of the winner's death and then also legal documentation

(03:36):
to redirect the payments. So in other words, it can't
just be okay, I had in my will that I
want the payments to go to this family member. It
would have to be more involved, where the death certificate
is provided to the Forida Lottery and all of the
legal documentation to redirect to the new recipient. So that

(03:57):
is an important piece of this process, which kind of
gets to the trust or beneficiary designations. This is pretty
much always the case, but certainly in this type of situation,
setting up a trust, a living revocable trust designating the
beneficiary directly with in this case the Florida Lottery, could
simplify the transfer process considerably. So now for the fun

(04:21):
stuff that we've gotten, the uh hey, in the event
of my death and I do with the annuity thing,
what happens here? So I'm going to break this down
using Saturday's powerball jackpot, which is estimated the gross one
point seven billion dollars, which, thanks Tonkle Sam, is a
one point seven billion dollar payout in name only. I'll

(04:41):
tell you one thing about the lottery folks. They're great
at marketing. They're really good at marketing because none of
the stuff is ever as it seems. And the whole
reason that these payouts get so big I covered this
year's ago is beg because they made it much harder
to win, which is why they get so big. And
then the bigger the jackpots, the more attention it gets.

(05:03):
The more attention the more that people spend on them.
So it's all part of a self fulfillment prophecy. But anyway,
if you were to take the lump sum payout after taxes,
what do you think you get? One point seven billion
is the gross that you're hearing your net three dollars
in just about now it's it's four hundred and eighty
five million, four hundred and eighty five million out of

(05:26):
one point seven billion. That is less than thirty percent
of what the gross numbers purported to be. Now, if
you were to take the annuity payouts, the total to
be distributed would be one billion, seventy two million dollars
and that would be paid in thirty installments across twenty
nine years. Now. Notably, the total annuity payment factors in

(05:48):
a five percent increase annually to account for inflation and
other factors. Now, from an analytical perspective, this is where
the rubber meets the road. The average annual rate of
return with the S and P five hundred is ten
point one percent. If one was to take almost all
the proceeds from the lump sum and invest them at
standard stock market returns, the total after twenty nine years

(06:09):
would be eight and a half billion dollars and a
half billion. Remember you started with four hundred and eighty
five million. If one were to take the annuity payments
and invest those as they came in in the S
and P five hundred and average rates of return after
twenty nine years, you would have about six billion dollars

(06:33):
six billion dollars. So, of course there are no guarantees
that the stock market would provide future returns at historic
rates of return, but regardless, I think the point is established,
hands down. The no brand response from surely an analytical
perspective is to take the lump sum you now. As
much as anything, the exercise helps illustrate the power of
compound interest. And remember, the whole point of annuities is

(06:54):
that you have an insurance company that's behind it. Right,
How does the insurance money company make money? They take
your money, they invest it, they get the excess return.
That is how annuities work. So because of that, it's
natural that you would have that kind of disparity. This
this is going to be true in its own way

(07:16):
for any annuity product over the opportunity to invest it
at market rates of return yourself. Now, one other little
note here for you. What percentage of lottery winners do
you think opt for the lump sum? I know it's
probably more of seventy five ninety three, wow, ninety three

(07:38):
percent of lottery winners do you offer the lump sum?
So there you go. It's always two sides of stories,
one side of facts. Those are the facts unless you
know they contradict what your wife is saying.