With the current Powerball jackpot approaching the $2 billion mark, the scramble to secure that winning ticket is in full frenzy. People are lining up at gas stations and convenience stores in hopes of buying a significant lifestyle upgrade. The chances are of winning the jackpot are probably greater than getting hit twice by lightning after getting bit by a shark. But with these overwhelming odds against them, it does not discourage people...
A potential winner daydreams about driving his new Lombardini to his waterfront mansion. But for now, he pulls his weathered Chevy sedan into the parking lot of his local Royal Farms store. He quickly awakens to reality as he bangs his knee on the door frame as he exits the vehicle. Making his way inside, he totally ignores the savory scent of fried chicken and takes his place in line at the lottery kiosk. As he waits his turn, he toggles back to his daydream.....
We can all relate to this to some extent. I mean, who doesn't dream about becoming rich and debt-free overnight?
So, let's dig into this. What would happen if you actually won the PowerBall jackpot?
The first big decision that you would have to make is whether to take a huge one-time payment or take your jackpot winnings over the next 29 years. While most people would probably opt to take the one-time payment, does it really make the most sense? You would certainly pocket more of the money if you took it over the long term. And many people don't realize that the taxes aren't factored into the lump payment. For example, if the jackpot is $1 billion, you might receive $400 million. So essentially, you're giving away the majority of your money in exchange for getting a big payout now.
And many people assume that the reason that the lump payout is reduced so significantly is because the taxman takes his cut at the time of the payout. No, sir! You will still have to pay tax on the $400 million which will likely reduce your winnings by another $100+ million. So, by the time it's all said and done, from a $1 billion jackpot, you might "only" pocket about $250 million. Yes, folks the state always wins!
So, why does the government shaft you for taking the lump payment, you ask? Essentially, it's because you're cutting into their capital. By screwing you out of hundreds of millions of dollars, they can now take "your" money and "invest" it in things that the government sees fit.
But wait there's more!
The reduced lump sum that the state actually lets you keep is handed off to an insurance company. The annuity payments are paid to you by these companies, and they assume any risk. The state washes their hands and walks away to another lottery payday. So, you see, the lottery is basically a Paul Bunyan-size cash cow for the state in every way.
If you're financially savvy, you can always take a big chunk of your jackpot and invest it. If you play you cards right, you could eventually recoup all of the money that you gave back to the government. Of course, this would be over a long course of time and it's not guaranteed. Keep in mind, roughly 90% of the lump-sum lottery recipients blow through all of their money within a few years. Are you financially disciplined enough to gain entry to the 10% Club?
Taking the 29-year annuity on a huge jackpot makes more sense, especially if you're relatively young. In addition to having a yearly paycheck, you also get a 5% increase every year to adjust for inflation. Not a bad deal when you consider that most working-class folks are only getting about a 3% increase.
Another huge advantage of taking the annuity is that you receive the full $1 billion jackpot (minus taxes). And as hard as it might seem to live off of $50 million a year, I have confidence that you can you. And think about it, with the 5% annual increase, you're going to get at least a $2.5 million bonus each year.
And some people have the notion that the annuity would stop if you passed away early. While it's not something you would need to worry about because you'd be dead, it's something to consider beforehand. If you pass away, the remaining payouts will go to your estate or your designated beneficiaries.
From the time of winning, you have 60 days to choose the lump sum vs. the annuity option. But get a head start and start thinking about it now!
......the man awakes from his daydream as he gets nudged to move ahead by the impatient customer behind him. He tries to decide on how much cash to shove into the mouth of the lottery kiosk. In the end, he opts to play a single $2 ticket. His thought is that it only takes one ticket to win. Why couldn;t this be the one?
Best of luck to everyone. And even if you don't win, enjoy your current blessings. Remember, the best things in life can't be bought.
Wishing all of you a safe and Merry Christmas!
kw
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