If your client won a billion-dollar lottery, do you know what you would encourage them to do? For instance, a $1.1 billion jackpot winner can choose between receiving a lump sum of approximately $525.8 million or the entire $1.1 billion paid out as an annuity over the course of 30 years.
While it is enticing to see all that money in a lump sum, ABC’s “Shark Tank,” Mark Cuban, encourages opting for the annuity. The self-made billionaire encourages winners to not take the lump sum, saying, “You don’t want to blow it all in one spot.”Â
While spending all the money too quickly is definitely a concern, it’s also important to understand the difference that choosing an annuity can make on winnings. Choosing a lump sum gets your client an immediate payout, but taxes will be imposed on the total amount of winnings. This means winners that opt for a lump sum will immediately jump to a new income tax bracket for the year, sometimes more than tripling their tax rate. By contrast, annuities defer taxes until payouts are received, and tax rates are based on the amounts received in each tax year. Therefore, winners opting for annuities can hedge their bets on a potentially lower tax rate in the future.
For instance, let’s consider the example of hypothetical jackpot winner, Bob. Bob has just struck $1.1 billion in lottery winnings. He can now choose between $525.8 million upfront or the $1.1 billion paid out as an annuity over 30 years. Here is a look at estimated net amounts after federal taxes. (Keep in mind that most states also tax winnings.)
Lump sum after federal tax: Estimated net $331,254,000
If you are in the highest tax bracket of 37% in 2024, choosing the lump sum means losing out on another $194,546 million for federal taxes, ($525,800,000 x 37% tax bracket = $194,546,000) netting you $331,254,000 for winning that $1.1 billion jackpot.
Annuity after federal tax: Estimated net $690,000,000
Choosing an annuity means receiving a first payment, followed by 29 annual payments that increase by 5% each time until the total winning amount is reached. Taxes are only due on annuity amounts in the year they are received. By selecting an annuity, Bob would see roughly $23 million annually after deducting federal taxes, for an estimated net total of $690,000,000 after federal taxes.
Ultimately, while Bob may see more money upfront with a lump sum, he’ll have more money in the end with annuity.
While annuities offer a great long-term financial opportunity for lotto winners, someone doesn’t have to hit the jackpot to leverage them. They offer a strategic long-term financial opportunity for anyone looking for help to secure their future. Whether it’s for retirement or simply ensuring a steady income stream, annuities can assist in providing stability and financial security.
Call Quantum to learn more about how an annuity might fit into your client’s financial strategy: 800.440.1088.
Sources:
https://www.annuity.org/selling-payments/lottery/
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AJ Wolfe has 10 years of experience in the industry and has worked for some of the nation’s leading financial and retirement services firms.
