If You Win The Powerball Jackpot, What's The Smartest Thing You Can Do With The Money?
If you've spent any time picturing yourself winning tonight's $1.5 billion Powerball jackpot, you've probably mostly just imagined how you'd spend it all — say, on a chic condo with walls lined with priceless dinosaur skulls, or by hiring Daniel Radcliffe to walk around at your parties while cradling a tiny Harry Potter doll of himself. Hey, those are all great ideas, and don't worry — when you're ludicrously wealthy, that kind of behavior is no longer considered "deeply creepy" — it gets bumped all the way to "charmingly eccentric"! Man, being rich is great already, right?
But while you're busy bidding on raptor craniums and hiring famous actors to appear in your poorly-conceived performance art, you'll also have to make some decisions about your lotto winnings — like how you'd prefer to have the money paid out to you, and what to do with the money after you get it. Sure, becoming insanely wealthy by total chance would be awesome — but you need a game plan for that money is you're gonna stay that way. So, let's say that at 10:59 p.m. EST tonight, your life completely changes. What are the smartest decisions to make with your new, theoretical lottery winnings?
Your first financial decision involves whether you take your money as a lump sum or an annuity — and experts are divided on which is the best decision. A lump sum is what it sounds like: your winnings (minus taxes) paid upfront. An annuity means that your winnings (again, after taxes) are paid out to you over the course of 30 payments. Lump sum winners get less money overall than annuity winners, but since they have more money to work with upfront, lump sum winners also have the option to invest more and start reaping greater financial benefits right away. Or they could accidentally blow their fortune in a blaze of glory (and solid gold monster trucks). You see why this is such a hot topic?
Since 2010, only one Powerball winner has chosen to take the annuity — but is taking the lump sum the right call, just because it's popular? In the New York Times, Josh Barro urged whoever wins this Powerball jackpot to take the annuity option. Barro argues that letting the government hold on to the money for you is a low-risk way to invest, as the tax savings and interest you accrue by using the annuity option are steady and reliable (he likens taking the annuity to investing in government bonds). In Inc., Mark Cuban also argues for taking the annuity — because it will prevent you from accidentally spending all your winnings straight out of the gate.
This might be a good option for the risk-averse (or those terrified that they will immediately spend all their money on life-size butter sculptures of themselves and their loved ones). But according to Walter Hickey at Business Insider, if you take the lump sum and invest it in a way that gets you at least a four percent return on your money, you'll end up with more cash in the end than if you'd taken the annuity.
So, the bottom line seems to be: it's smarter to take the lump sum...if you feel able to invest the money in a way that would give you a minimum of a four percent return. And taking the annuity is a better option for anyone unsure about their own abilities to control their spending, or ability to turn down the inevitable flood of friends, family members, and total strangers who will start asking you to invest money in their company that makes yoga pants for dogs (if you're concerned about people hitting you up for cash, which you should be, you can claim your money anonymously in states that permit this, or put your money in an LLC instead of your name to maintain your anonymity).
And remember: either option will push you up into the top tax bracket, where you will be either taxed on your jackpot all at once, or over again each year as you receive your annuity payments. You'll also be taxed on investments made with your lump sum money. Look at you — you're finally rich enough to complain about your taxes in a totally out-of-touch way that makes all your old, regular friends feel uncomfortable! And they say dreams don't come true.
So if you win tonight, take a moment to think about taxes and investments before you buy that toilet made of diamonds. And if you don't win tonight and feel jealous, remember — 44 percent of lottery winners spend all their earnings within five years. Which means: in five years, someone is gonna be ready to sell you a toilet made out of diamonds for cheap.