$1 Billion Jackpot: Would You Take an Annuity or Lump Sum? [Financial Breakdown]

the mega millions lottery just crossed over one billion dollars and is officially the second largest jackpot in game history and so everyone's talking about what they would do if they won that amount of money hey sean look i just won the lottery but first there's a very important decision to make because okay when you win the lottery you have two options you could either a take a lump sum payment option or b take an annuity or annual payouts and there are some serious pros and cons of each option now before i get into the details of what i would do in some calculations i'm curious okay which option would you take tell me down in the comment section below and also let me know if i change your mind after you watch this entire video because today what i want to do is cover the lump sum option versus the annual payout option go over some investing scenarios and calculations to see which option is better and then reveal how previous lottery winners went completely broke by choosing the wrong option [Music] alright let's talk money starting with chapter number one lottery sum versus annual payouts so here's the thing even though the lottery is currently advertised and valued over 1.1 billion dollars the winner won't actually receive anything close to that full amount and that's because of two big factors okay first factor number one the payout because when you take the cash lump sum option then you're only allowed to take roughly 60 percent of the lottery winnings which means that 1.1 billion dollars you thought you were going to get suddenly turns into only 648 million dollars so basically you'd be giving away 400 million dollars hey sean look i can throw money in the trash okay but look i hear someone out there saying it and yes okay 648 million dollars is still life-changing money however let's look at the annuity payout okay with this option you get the full 1.1 billion dollars but you have to take it over a 30-year period which comes out to be about 37 million dollars per year and yeah that's still life-changing money as well okay so that's one big factor the second big factor is number two taxes so going back to the lump sum option after you receive the 648 million dollars then you would also be taxed at a 37 tax rate which is the federal tax rate for any individual that makes over 539 900 per year as a single tax filer or hundred and forty seven thousand eight hundred and fifty dollars per year as a married filing jointly taxpayer but anyway at that rate you would pay about 240 million dollars in taxes but wait there's more you'd also have to pay state taxes as well and worst case scenario if you live in a state like california then you're going to have to pay an extra 13.3 percent in state taxes or 86 million dollars so instead of getting the 1.1 billion dollars that you thought you won you'd actually take home an estimated 322 million dollars which is only 30 percent of the total lottery on the other hand if you took the annual payouts then again you get the full 1.1 billion dollar prize but you still need to pay federal and state taxes so i guess the only guaranteed winner of the lottery is uncle sam anyway under the same circumstances as before the lifetime tax amount on the annuity would be roughly 553 million dollars however there are some tax strategies that you could deploy to reduce the taxes paid on the annuity over time so in this scenario the lump sum leaves you with 322 million dollars and the annual payout leaves you with 547 million dollars creating a 225 million dollar difference so how can you make up the difference let's talk about that in chapter number two investing scenarios and calculations but really quick before i move on if you're appreciating this video at all please do me a favor and click the like button for the youtube algorithm it really goes a long way in helping this video reach more people like you who want to learn about taxes in the lottery all right number two investing scenarios and calculations now there are some lifestyle factors that come into play when you're making your decision one factor is age right because if you're over 60 and you want to be able to afford the same type of live forever technology as jeff bezos then i don't blame you right take the lump sum payment option however if you're under 40 then you've got some thinking to do you've got some time and you could earn a lot more over your lifetime okay so one scenario i often hear is hey sean i could invest the lump sum payment and make way more than an annuity option which is kind of true but maybe not realistic because in this scenario you could take the 322 million dollars and invest it into something like an s p index fund which historically generates about a seven percent return which then returns you 22 million dollars per year but here's my problem with that okay you just won the lottery what are the chances that you're going to invest that entire amount i think that's very very unlikely so scenario number two would be invest half of the lump sum option which i still think is pretty aggressive but hey let's see what it looks like invest 161 million dollars at a seven percent return and then you'd get about 11 million dollars per year which means hypothetically if you realize 11 million dollars per year it would take you roughly 20 years just to break even with the annual payout but of course with compound interest that could grow at 800 million dollars after 30 years so your portfolio could end up looking like 161 million dollars in cash and an investment that grew to 800 million dollars after 20 capital gains taxes meaning you have about 961 million dollars after 30 years okay hopefully i'm not losing you with all the math but basically you could easily make up the difference between the annual payout and the lump sum payout if you invested the money right well before you say yes let's look at scenario number three because something that is often that factored in is that you could also invest those 37 million dollar annual payouts as well and since you're getting the money over 30 years you could take some time to learn how to invest in other vehicles like rental properties or upcoming startups to get a bigger return so if you took half of the annual payout and invested about 18 million dollars at a 15 return which is definitely achievable in real estate investing or private equity then after a 30-year period you would also end up growing your investment to roughly 800 million dollars after 20 capital gains taxes so the portfolios are almost identical all right so that's a whole lot of numbers of math but to summarize if you plan on being a good investor then an annuity payment can still beat the lump sum option on the other hand if you are a bad investor or you just have no experience investing then you could end up losing your big lump sum payout in fact nearly 23 lottery winners went completely broke losing millions of dollars in record time let's talk about that a little bit more in chapter number three lottery winners who went completely broke so first of all if you win the lottery please please please call me email me come to my house whatever you got to do so that i can personally help you by the way my services start at 1 million dollars per hour anyway i read a great article that recaps how lottery winners went flat broke one story involves a guy named gerald who won a 10 million dollar jackpot then he started blowing his money on cars partying gifts and got into some legal entanglements which i would guess are expensive lawsuits and by the end of all of that he ended up working for a farm before ouch another story involves a guy named mikey who won an 11.8 million jackpot but he also blew his money on a lot of materialistic things then a few years later he was caught working for a slaughterhouse for just an extra few hundred dollars per week game and jack whittaker won the 314 million dollar powerball jackpot which at the time was the biggest lottery winning in history now jack he was a giver he gave donations to churches he gave to family members to strip clubs and other places routinely but perhaps he was too generous because he blew all his money and his life turned to ruin ultimately losing his precious loved ones the article goes on to account 20 other stories which is actually an enjoyable slash horrible read which i'll link down in the description below now all these stories have a common theme and that is many lottery winners go broke because the payout is much less than they thought it would be and they start spending uncontrollably on things they don't really need or they make bad investment decisions trying to make more money because they have no investing experience or they slip into a deep depression and a lot of bad habits because as they say money can't buy you happiness and it's easier to lose yourself when you have all the money in the world or the winners end up buying liabilities that they can't sustain because bigger houses and more expensive cars come with higher property taxes higher insurance payments higher maintenance costs and those costs never go away so maybe some of these winners would have been better off taking it nice and slow with the annual payouts alright so did i change your mind don't forget to tell me down in the comment section below which option you think is best coming up next i have a video on the fastest way to become a millionaire based on my experience other than hitting the lottery of course and another video on business ideas so check those out if you haven't already and i'll see you over there

Channel: LYFE Accounting

Views: 291,257

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Id: sGn2EdFGyqU

Length: 10min 57sec (657 seconds)

Published: Fri Aug 05 2022