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What to do when you win the lottery

Dear Dr. Don,
I've just won a $50 million lottery. Should I take all cash or an annuity? -- Fortunate Frank

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Dear Frank,
It depends on a lot of things, one of which is the interest rate the lottery uses in calculating the annuity value vs. the immediate payout. Another is the uncertainty associated with future income taxes.

The conventional wisdom is to take the money as a lump sum. That's because the lottery takes the cash prize (today's dollars) and uses that money to buy investments that will fund the annual payments. That may mean that the lottery buys the winner(s) an annuity, or it may buy bonds with maturities that roughly match the payment schedule.

A recent Powerball jackpot winner chose a one-time, pretax cash payment of $34,662,300.66 vs. $59.5 million in 30 annual payments with the first payment at the beginning of year one. This equates to an annual interest rate of about 4.26 percent.

Bankrate has a quiz that will test your lotto savvy, along with a feature that talks about people who had problems managing their newfound wealth. But my favorite Bankrate feature on this topic is, "You won the lottery! Now what?".

The real lesson here is a multimillionaire can afford to pay for professional advice. If you don't have one already, find an accountant, an attorney and a money manager that you trust to help you manage this newfound wealth. Congratulations!

Bankrate.com's corrections policy
-- Posted: Aug. 10, 2005
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