This could be a very good year for a lucky winner of the fourth biggest jackpot in Mega Millions history.
And yet, starting 2023 with $785 million might have a downside.
“The curse of lottery losers is very real,” said Andrew Stoltmann, a Chicago-based attorney who has represented several recent lottery winners.
One of the very first decisions a winner must make — accepting the jackpot as a lump sum or an annuity — often ends up being their downfall, Stoltmann said.
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Tuesday night’s draw jackpot is now the fourth-largest lottery prize of all time, with an estimated $785 million, if you choose to take your windfall as an annuity spread over three decades. The initial cash option – which most jackpot winners choose – for this draw is $403.8 million, as of noon Tuesday.
Nowadays, the annuity option is more important than it was before, compared to the cash option, thanks to higher interest rates, which allow the game to finance more profitable prizes. important, according to the Multi-State Lottery Association.
Still, “over 90% of winners take the immediate lump sum,” Stoltmann said. “It’s usually a big mistake.”
Not only does an annuity offer better value for money, but spreading the payments also gives you the opportunity to build an experienced team, including an accountant, financial adviser and lawyer to protect the money and your best interests, according to Stoltmann. .
“Few lottery winners have the infrastructure in place to run a lottery windfall,” he said.
This provides a level of financial security that the package does not provide, even with the inevitable onslaught of overselling, over-purchasing, or bad investments.
“Making a mistake with the first year’s earnings is not catastrophic if the winner is going to receive another 29 years of payouts,” Stoltmann said.
Distribution of Annuity Payments vs. Lump Sum Payments
Spreading payments is a valid consideration, “especially in light of math and psychology,” said Joe Buhrmann, certified financial planner and senior financial planning consultant at Fidelity’s eMoney Advisor.
“Even if you spend it all, there’s another check coming in next year,” he said. “There’s a lot of certainty in that.”
Then there are the tax consequences: choose the cash option and a 24% federal withholding tax is waived – or about $96.9 million – with another hefty bill likely due at tax time.
“The only deduction you have is the cost of your ticket,” Buhrmann said.
Of course, you’ll also pay tax on annuity checks, but maybe not as much on investment income if the government does the work for you (essentially putting the earnings into a bond portfolio rather than the way you have invested it).
Although you can probably earn more by investing in the market over the same time horizon, there is much less risk since the annuity payments are guaranteed. Even if you die, future payments are part of your estate, like any other asset.
“Don’t get caught up in the nickels and dimes,” said Susan Bradley, CFP and founder of the Sudden Money Institute in Palm Beach Gardens, Florida.
Either way, “the payouts are huge and you’ll never be the same again,” she said.