In order to answer this question, you would have to analyze your personal situation. Different circumstances warrant different decisions. Take for example Mrs. Louise Outtings who won the Megabucks Lottery in Massachusetts a few years ago. She won a whopping 5.6 million dollars (projected winnings).
She wasn’t given the option of getting her winnings as a lump sum. In her case, she has no choice. The Massachusetts State Lottery Commission only gives out the winnings at 20 equal installments over a period of time. The thing is, Mrs. Outtings is not exactly a spring chicken “ she was, at the time of her win, 94 years old! As such, she probably won’t live long enough to enjoy all her winnings.
However, that is such a special case. All things being equal, what should your choice be? Take the lump sum payment or extend it over a period of time? According to expert Rick Bloom, his general rule is to take the lump sum option. Again, this is considering that one’s situation is not exceptional. Why does he recommend this option?
First, consider the taxes. No matter which option you choose, you would still be taxed at the highest bracket. At present, the tax rate for lottery winnings would be about 39.5 percent. If you take out all your money you will have the chance to invest it and make it grow more. The applicable tax for this investment would then be only about 20 percent, which is a lot of savings for you.
If you make taxes your main consideration, it makes sense to merely take out the lump sum. It lowers your tax burden over the long run as you receive capital gains treatment and then have the chance of choosing your means of increasing your earnings.
However, you would also have to consider your investment savvy. Mismanaging lottery winning is one very common scenario. Having a windfall sometimes knocks the senses out of people. Still, having the payments staggered is not a guarantee of proper financial management. With that in mind, it would still be better to get the lump sum and employ the services of a financial adviser.
Whether you get the lump sum or extended payments, the bottom line is your financial sense. Taking the time to plan and make decisions is what will benefit you in the long run.