to do when you win the lottery
I've just won a $50 million lottery. Should I
take all cash or an annuity? -- Fortunate 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!