The lottery is a game where players pay a small amount of money for a chance to win a large sum of money. The prize amounts can be many millions of dollars and the odds are usually very low. It’s human nature to daydream about winning the lottery or backing the right horse in an IPO, and those daydreams naturally revolve around what one would buy with all that new wealth.
When someone wins a lottery jackpot, they have the choice to receive their winnings in one lump sum or as an annuity with payments made over a set period of time. On average, more than 90% of winners choose the lump sum option. This is despite the fact that they will only get about half as much upfront, before taxes are taken out. The annuity option, on the other hand, will give them around twice as much money over a long period of time, after taxes are paid on each payment.
It’s important for lottery winners to understand the tax implications of both options. It’s also important for them to think about how a windfall of this size will change their investment goals, strategies and risk tolerance. If they don’t, their financial future could be at risk of a major hit. Ultimately, a lottery winner’s choice of payout is just as important as their lottery ticket.