Assignment task: Choose one of the following topics to present to your peers in a professional analysis using a minimum of 350 words.
Considering the time value of money (TVM) should winners of a lottery take the lump sum payment or the annuity?
Your critical response should have a minimum of two sources published in the last 12 months which should be used to support the content within the postings, proper in-text citations. Your responses should be professionally written and correctly formatted references should be prepared consistent with the APA. The list of references should be physically positioned at the end of the postings.
Post by classmate:
I chose to comment on whether a lottery winner should select a lump sum over an annuity payment schedule. Personally, I would choose the lump sum payment option over the annuity schedule, unless I was able to create a trust to receive the payments long after I was gone. As I extended my research, I found that per The article in. Annuity the author states, "Lottery winners have two payout options: a lump sum or an annuity. Taking a lump sum means you will receive 40 to 50 percent of the jackpot for immediate use or investment. Lottery winners who opt for an annuity receive annual payments over time. Some states allow selling the annuity for a discounted lump sum if preferences change." (Turner, n.d.)
Per my preference, a lump sum serves to fund long-term investments, in comparison to an annuity that provides extended payment schedules. Our reading suggests that each winner's choice should be based on their own financial goals, while each winner must adhere to specific rules that apply to each unique lottery game. The second option, annuity payments, ensures the winner a larger total payout as it is disbursed in a payment schedule over the life of the amount. Interestingly, the structure of annuity payments will be different based on which state the lottery win is located rules and the lottery itself.
Additional research states that lotto payments can be made by check or ACH transfer.
"Both Powerball and Mega Millions offer lump-sum payments. Powerball offers 30 payments over 29 years. Mega Millions uses an increasing rate schedule. This includes an initial payment and 29 annual payouts, each larger than the last." (Megamillions.com, 2023)
Research shows that there are benefits to both options, the lump-sum payment and the annuity schedule payment option for lottery winners. It is important to choose wisely as this choice can affect how much of the proceeds the winner will get by a large amount.
"For example, in the August 2022 Powerball jackpot, the winner could have chosen a $122.3 million lump sum or a $206.9 million annuity payout over 29 years." (Megamillions.com, 2023)
My preference, the lump sum, would provide immediate cash and the option to choose if the winner wants to avoid long-term tax implications. "Annuity payments offer tax benefits and can prevent overspending lottery winnings. They provide a guaranteed income and can lead to more money in the long run." (Turner, n.d.)
Ultimately, it depends on individual preferences and financial goals. Prior to making a decision annuity.org provides a great resource of things to consider.
Lump Sum vs. Annuity
Lump Sum
Annuity Payments
Payout Structure
The winner receives the entire value of the prize at one time.
Payouts are distributed evenly at a set interval until the total winnings are disbursed.
Tax Implications
Federal taxes are due on the total amount of winnings when claimed. Winners may move to a new income tax bracket for the year - and their tax rate can more than triple.
Taxes are deferred until payouts are received. Winners choosing annuity payments often hedge their bets that tax rates will be lower in the future.
Investment Opportunities
Payees can invest large sums of money sooner in order to capitalize on potential returns.
Poor money managers cannot make large investments or other imprudent spending choices.
Liquidity
Once taxed, lump-sum funds can be accessed and used as the winner sees fit.
Annuities are inflexible and prohibit winners from accessing cash in case of emergency.
Best Suited For
Prudent investors who possess the knowledge to put their pot of winnings to work and manage their money wisely.
Those choosing to guarantee a steady flow of winnings that will continue to earn interest - without the temptation to overspend.
(Turner, n.d.)
Berk, J., Demarzo, P. (2020). Corporate Finance (Fifth edition). Pearson Education, com. (2023). Difference Between Cash Value and Annuity. Retrieved from (Megamillions.com, 2023)