Photo: Flickr / The Suss-Man (Mike)
Yesterday, we asked readers how they’d take their lottery winnings if they won this week’s Mega Millions jackpot. The choice is between a lump sum and annuity. Mega Millions describes the options: “Annuity option: Provides annual payments over a 26-year period. For every $1,000,000 in the jackpot, you will receive approximately $385,000 per year before taxes. Cash option: A one-time, lump-sum payment that is equal to all the cash in the Mega Millions jackpot prize pool.”
As of press time, 88 per cent of our readers would take the lump sum. But is that a smart choice? We asked Libertas Wealth Management advisor Adam Koos to give us his take, and he told us the lump sum wins by a longshot. Here’s why:
It’s a smarter investment. This week’s jackpot stands at $540 million, with the cash option being $389 million. Assuming a winner pays 35 per cent of income tax, that comes to $252,850,000. Putting that into a super conservative portfolio—without touching the principal—that returns around 3 per cent would generate a princely $7,585,500 in a year, says Koos. And if you leave this world too soon? No worries—your inheritors will still have the principal to play with.
More control of your money. When Ohio state workers are given the choice between a reduced pension check or annuity when they retire, Koos always tells them to take the check. “You can always make up for the difference by taking the lump sum and investing,” he says. And why wait for a yearly allowance from the lottery commission—which could go out of business theoretically—to spend or donate your money? “You can’t get more money if you have a cap on it,” says Koos, “no matter how much you need or want to give to charity.” Another note: If your spending habits suck, this won’t make them better.
You’ll beat the IRS. Today’s tax bracket for the ultra-rich is historically low—35 per cent. The current jobs bill being proposed could hike that bracket to 39.6 per cent. If that happens, get ready to pay more on your lottery payout each year. And the bracket could always go higher. “It’s better to take the tax hit today, then invest the rest of the principal in various ways,” says Koos. “Pay it up front while the taxes are low.”
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