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Which lottery payout scheme is better?
If I win the lottery, which should I choose, the lump sum or the annuity option?
Answers( 1 )
Some experts say you should receive the prize in an annuity because you will get a bigger sum. Others say the lump sum is better because you will earn bigger through investment. Here is an interesting article which says you should do a combination of both:
Before we explain the concept of "lottery payout combination," let us talk about how the two payment schemes work. If a winner opts for the annuity, they will receive payments over a period of 20 to 30 years. If you are going to look into taxes, it is a lot better to choose the annuity option. Essentially, with this option, the government invests the entire amount (before taxes) and the winner only has to pay taxes on the amount you receive every year. They would not be taxed on investment income because they are not the one investing the money.
On the other hand, when the winner chooses the lump sum, they have to pay taxes twice. They will pay duties on the initial lump sum as well as on any profit they earn every year from investing it.
However, financial advisor David Blanchett advises that the winner should do a "combination of both an annuity payout and a lump sum." What they should do is take the lump sum option and then go to a private company to buy their own annuity. There is a possibility of a bigger return when the winner buys their own annuity. This dual approach also provides the winner to efficiently manage their wealth and not spend most of it within a few years.