Why the Winner of the $1.6 B Mega Millions Jackpot Should Go for the Lump Sum

Mega Millions
Thursday March 14, 2019 09:46 am

The Lottery Lab Staff

On October 23rd, 2018, Mega Millions announced a single winning ticket for a jackpot worth $1.6 billion. This was the largest Mega Millions grand prize ever and highest lottery jackpot in US history, period. The winning numbers announced for the $1.6 billion Mega Million jackpot are-

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Mega Millions released the information that one ticket sold in South Carolina got all six correct numbers, whereas there are 36 other tickets across the country having 5 correct Mega Millions numbers. Surprisingly, the winner of the jackpot worth $1.6 billion hasn’t come forward yet. $1.6 billion is an insanely huge amount and the individual with the winning ticket will have to make a big decision: Take the lump sum or annual installments?

The actual jackpot amount is $1.537 billion which means if the winner opts for the annuity payment option they will recieve 30 installments over 29 years with the average amount of $51 million each installment (pre-tax). Their other option is to take out the entire amount in one go which means the winner will end up with much less than they would by taking the annuity. If they take the lump sum payment, the winner will end up with a total of $878 million.

Well, it doesn’t just end here! The Mega Millions winner will be subjected to taxes, for obvious reasons, and this would end up bringing down the takeaway prize significantly. The lump sum of $878 million would dwindle to approximately $553 after a tax of 37% for federal taxes.  This same tax on the annuity would bring the payment down to $32 million from $51 million. And then there will be state taxes which will reduce the cash prize further.

Bonus read: Basic Guide to the State Income Tax

The Mega Millions ticket worth $1.6 billion was sold in South Carolina where winners have to pay 7% of their total winnings as state income tax. This brings down the lump sum of $553 million to $492 million after taxes and reduces the annuity to an approximate installment of $29 million every year after the federal and state income taxes, which makes a total of $856 million after 29 years. That is almost the double amount of the one-time lump sum payment after federal and state income tax.   

But the major question is whether the lump sum or annuity is better for lottery winners. Both payment options have their own set of perks and pitfalls. But one should assess their financial and psychological circumstances in order to choose the best option. Here are some points one should consider while choosing a payment option-

Why is it smarter for the winner to take the lump sum?

Assuming that the winner won’t blow though the money in a hurry and will invest a big chunk of it rather than going on a wild spending spree, the lump sum is the better deal. Naturally, no lottery winner is going to save and invest it all , so let’s just assume that after receiving $492 million after taxes they invest a huge chunk of the cash prize, about $475. That investment could generate more than $2 billion over the course of 30 years using a conservative rate of return of 5% and factoring in compound interest. Basically, without lump sum payments you can’t think of making big investments as with annuity you’d receive a small part of your total winnings.

Even if the winner goes for annual installments and invests most of his earnings every year, the grand total would still be a lot less than the lump sum.

Why is it smarter for the winner to take the annuity?

The lump sum option is not necessarily a great idea for every lottery winner depending upon their psychological and financial circumstances. The annuity is the better option from the psychological standpoint. Reviewing the long depressing history of lottery jackpot winners going broke due to wild spending habits, the annuity can be a better payment option for not wrecking their life after hitting it big. There are many winners who lost their money, loved ones, finances, etc. after winning and taking the lump sum. For some winners, having access to less of the prize is better as “more money, more problem” can a reality for big lottery jackpot winners.

With the annuity, they have a cash flow incoming in yearly installments which helps keeps them sane and keeps the money flowing. Plus, the tax deductions can be far less as compared to the lump sum, because there is time to establish tax shelters. With the annuity, the damage you can do is limited and you can always expect a fat check every year!

Hence, the winner should consider his financial aspects, psychological factors and future plans as well to choose the most suitable payment method for them!