If you?re a lucky lottery winner, you may be so caught up in the excitement of winning that you don?t consider what to do with the funds. You have an important choice to make: take the money up front in a lump sum or spread it out in annual payments (also called an annuity). Deciding between lump sum and annuity can be a difficult choice to make, however, there are important pros and cons to consider for each option.
Annuity
- Pros:
The most obvious advantage to receiving a lump sum is that you get the money up front. If you?re in a dire financial situation, a lump sum will put the cash in your hand to put towards whatever you may need. A lot of people use their lump sum winnings to pay off crippling debts.
Another benefit arises in the opportunity to invest those lump sum earnings towards something greater. If done right, a lottery lump sum payout can be invested for continuous profit and financial longevity. - Cons:
One disadvantage to taking the lump sum is the temptation to spend it all. Too many lottery winners go broke in under a year because they wasted their funds on frivolous luxury items and did not spend or save wisely. This con, however, is totally dependent on the individual and their money management skills.
Another con comes in the form of taxes. Unfortunately, taxes on your winnings are inevitable. There is no way to avoid them, but taking the lump sum will tax the entire amount in the year paid. Everyone lottery winner?s situation is different, and the tax hike for the year may not affect someone?s overall financial standing that greatly.
Annuity
- Pros:
In the long run, you will receive more money if you choose to go with an annuity. The bonds will generate interest over the many years your winnings will be paid out to you. This offer does sound attractive (who doesn?t want more money??) but remember that the money could depreciate over time.
Annuities are great to budget your funds as well. You?re not tempted to spend it all at once like you may be with a lump sum. - Cons:
Unfortunately, there are some downsides to choosing an annuity. If you rely on your payments for your main source of income, you might be in trouble when those payments stop. Although an annuity settlement
can make it easier to budget, it makes it much harder to save if you?ve relied on your payments to pay the bills for your lifestyle.
These pros and cons are important to consider, but before you make a choice, take a look at your personal needs to determine if you’d best benefit from a large sum of money now or many payments spread across several years. Your age, financial situation, and job situation might greatly impact you decision.