Lottery Annuity Vs. Lump Sum
Congratulations! You won the lottery. Should you take a lump sum amount up front or an amount each year for a specified number of years?
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Annuity
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An annuity is a series of annual payments for a specified number of years. The annual payment amount times the number of payments is the face value of the annuity. In a lottery, the face value is the advertised jackpot.
Lump Sum
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In a lottery, the dollar amount of the lump sum option is the cash value (present value) of the annuity based on a specified interest rate. That is, the lump sum is the amount of money that you could deposit into an account at the specified interest rate and at the end of the annuity term, you would have an amount equal to the face value of the annuity.
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Financial Consideration
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According to Lotto People magazine, the critical component needed to determine if a lump sum is a better financial deal than an annuity is the interest rate used to convert the prize from the face value to cash value.
Financial Insight
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Bankrate.com reports that Craig Wallace, a senior funding officer for a company that buys lottery annuity payments in exchange for lump sums, states that people are far better off taking a lump sum and investing it themselves.
Other Considerations
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Other considerations in choosing between a lottery annuity and a lump sum are your age, tax consequences and whether you can manage a lump sum payout.
Caution
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If you win the lottery, both Lotto People and bankrate.com suggest consulting a qualified financial adviser to help you decide the best way to receive and manage the money.
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References
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