Most people think about winning the lottery as though it would be their big break — and for some Americans, it is! Maybe you need to pay off some student loan debts, maybe you’ve been wanting to start your own small business, or maybe you just deserve to give yourself a treat, in the form of a new car, for working hard 40 hours a week.
The truth is, many Americans still struggle with their finances (even though the Recession is technically over). And this also applies to those few lucky people who manage to win the lottery, believe it or not. Although the lottery seems like a fairly simple and cheap game to play, it’s pretty complicated — especially if you end up winning big.
Here are a few things that you should know about the lottery, and how to make the most of your money, so that if you happen to win something (fingers crossed!) you’ll be able to make smart decisions about how to handle your money.
A lottery payout refers to how the money is distributed after a person wins. The big decision here is whether to take the money in small installments over a long period of time, or whether to take the cash all at once and run (ideally to a tropical island where you’ll never have to work again). In most states, winners have the ability to choose between long-term annuity lottery payments and lump sum lottery payments, so let’s look at how these differ.
Long-term annuity payouts are often favored over lump sum lottery payouts because the taxes are a bit lower, and because winners generally take home more money with a long-term plan.
The downsides to a long-term annuity payout plan are very similar to retirement annuity plans offered by insurance companies: when your money is locked away in an annuity plan, it’s impossible to withdraw (unless you want to pay early withdrawal fees around 10% of the total amount). Additionally, many people forget to consider inflation rates and tax rates while creating an annuity payment plan, and they forget that $20,000 in 2025 will hold less value than $20,000 in 2015.
Lump sum lottery payouts are typically chosen by people who feel confident in their financial management skills, and their long-term goal is to invest the money now in order to receive a better return on investment later. Unlike an annuity payout, lump sum lottery payouts will allow you to have complete control over your money right from the start.
Be wary, though, because lump sum lottery payouts are not without disadvantages. The taxes tend to be higher with these payment plans, and the government takes well over 25% of the winnings (in 2013, the federal tax rate alone was almost 40% for lump sum lottery payouts). Ultimately, the person brings home less cash with a lump sum payout than he or she would bring home with an annuity plan.
Contrary to what most people think, winning the lottery can actually cause a lot of problems. People often spend money on frivolous things, or even give cash away to friends and family, without realizing that a) their money isn’t going to last forever; and b) the government will tax everything it can get its hands on (and yes, there is such a thing as a Gift Tax in the U.S.).
The truth is, the majority of lottery winners end up going bankrupt within five years of winning. This is especially common among people who choose to take a lump sum lottery payout without having a financial adviser or investor to help them out.
Almost half (48%) of all lottery winners end up going back to work after “winning it big” because an annuity payout plan doesn’t guarantee a lot of money right away.
And of course, after taxes are thrown into the mix, lottery winners are actually lucky if they manage to take home half of the money that they won.
The best way to figure out which payment option is best for you is to look at your spending and investing habits. If you aren’t completely confident that you’ll be able to manage the money by yourself, this is not the time to feel ashamed about seeking help from a financial management service.
Most importantly, remember that you can change your mind if you realize that you’ve chosen a payout plan that isn’t working out too well. Many people turn to companies like Structured Asset Services when they’ve chosen an annuity plan and decide afterward that they would rather have a lump sum of cash — so if you happen to be in this situation yourself, or if you want some advice on how to handle a lottery payout, don’t hesitate to contact us today.