Lottery Winners Could ‘Make Bad Decisions,’ Says Financial Advisor — Is a Lump Sum or Annual Payout Smarter?
Written by
Nicole Spector
Edited by
Renee Ross
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Lottery jackpots can reach epic heights. Case in point: the Mega Millions jackpot that surpassed $1.2 billion after the Tues, August 1 drawing. Someone (or some people) will win eventually, and the burning question for them will be, “What will you do with the money?“
The better question may be, “How will you safely and effectively manage this money?” Unfortunately, lottery winners are notorious for making poor decisions with their winnings. Some people have even ended up in even worse financial shape after landing a jackpot than they were previously. Where did things go wrong? It may have all started in the way they accepted their winnings: Lump sum (meaning getting all the cash in one fell post-taxed swoop) or taking an annuity, where the winnings are distributed over a number of years.
“It’s the most important financial decision you’ll ever make in your life,” wealth planner Robert Pagliarini of Pacifica Wealth Advisors told The US Sun. “Right off the bat, you’re making a life-changing decision that you cannot change your mind on.”
Pagliarini added that by taking a lump sum, “The advantage is they get to control the funds now, but that’s also the biggest disadvantage.”
Once you get the lump sum, you’re forced to manage a possibly unbelievable windfall in an instant. This means if you’re not making every financial move 100% correctly, you’re putting as much as your entire new fortune at stake. Unless you have an army of smart financial experts and lawyers at the ready, an annuity may make the most sense.
“The annuity gives you the opportunity to make bad decisions and still recover from them, while the lump sum puts pressure on the person not to make mistakes,” Pagliarini said.
When deciding how to take the money, winners should also understand the tax situation associated with a lump sum or annuity payout. With an annuity, the tax owed will be calculated as it stands at the winning time — which helps hedge it against inflation.
When you take a lump-sum payment, you take all your winnings at once, after paying out the taxes. Ultimately, this translates into a higher tax burden.
More From GOBankingRates
