When Business Insider asked billionaire Mark Cuban for his advice to the winner (or winners) of the record-high $1.5 billion Powerball lottery, one piece of wisdom he shared was “Don’t take the lump sum. You don’t want to blow it all in one spot.”
For those of us who aren’t lottery regulars, winnings are offered in two ways: one large payment upfront (the “lump sum”) or a series of smaller payments over 30 years (“the annuity”).
Seizing the day and the cash, most people secure their lump sum and dance off into the night.
They might, however, be smarter to take the annuity. Here are three reasons why:
1. You get more money overall.
If you’ve been doing any reading at all on the lottery, you probably know that the winner of $1.5 billion doesn’t actually take home $1.5 billion in a single check.
In the case of this drawing, if the winner takes the lump sum, they will get $930 million before taxes. If they choose the annuity, they will get the full $1.5 billion over 30 years, starting with a check for $22.6 million — again, before taxes.
USAMega.com has an excellent breakdown of take-home winnings by state, after federal and state taxes. Hint: It’s even less.
2. You limit your chances of blowing every cent.
It’s not uncommon for a lottery winner to take the money, spend it all, and lose every cent.
As correspondent Josh Barro writes in the New York Times, “The great thing about the annuity is, no matter what stupid choices you make this year, you’ll have an enormous check waiting for you next year — all the way until 2045.”
3. You have an excuse to keep it.
Barro also points out that, since that first check for $22.6 million sounds like so much less than $1.5 billion (although in reality, it’s likely that most people would be pretty happy with even a one-time check for $22.6 million) the winner will have a little more leeway to keep their money from evaporating into a sea of friends and family.
“The big advantage of the cash prize is flexibility, but let’s not underrate the value of the annuity’s inflexibility,” he writes. When well-wishers come to collect, “Being able to tell them that this year’s check is only for $22.6 million, and that’s really not very much after taxes and the new mansion and the summer house and the cars and the boats and the new political magazine, will help you conserve your fortune.”
Cuban also has advice for this situation: “Tell all your friends and relatives no,” he says. “They will ask. Tell them no. If you are close to them, you already know who needs help and what they need. Feel free to help SOME, but talk to your accountant before you do anything and remember this, no one needs $1 million for anything. No one needs $100,000 for anything. Anyone who asks is not your friend.”