this post was submitted on 30 Dec 2024
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Lotterys are usually paid out in annuities where you would get that amount over a period of 10-30 years. However, they also give a lump sum amount which is usually ~half the stated amount and after taxes you could expect to receive 1/3 the stated amount.
Still, it's generally best to take the lump sum unless you have very bad self control and would blow through the money.
Why? I would assume it's the other way round.
The lump sum will grow to be worth more than the annuity over the same period if properly invested
Wouldn’t you pay a lot more taxes on the lump sum and subsequent capital gains?
Not when invested properly. Using easy examples, if you win a million dollars and take it over 30 years, say you're taxed 20%, you get $800k. You choose to take a lump sum and they only give you 30% of the value, you get $300k. Investing that $300k at 5% over 30 years, you've got an additional $55k over what you would have gotten over the same time period. Now, the average market return rate is closer to 3-5% higher than that, so that 5% return is a conservative estimate of what you have after fees and pulling some out for yourself (3% is a recommendation I've heard), putting you well above what you'd get from the annuity.