Hypothetically speaking, let's say that you won your state lottery. Not the Powerball or Mega Millions or anything over the top, but just your state lottery. Which payment option would you choose and why?
Note: we are going to use the numbers for the state of Ohio for this exercise. In which case, the total advertised amount of the jackpot is $4.4 million.
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Option 1 - Annual installments
For the annual installments option, you start with the jackpot amount of $4,400,000 and divide it by the number of years you will receive annual installments (30 years) and come up with a total of $146,666 a year before taxes. After you remove the amount in taxes (25% federal and 6% state for Ohio for a total of 31%) you end up with a total of $102,200 a year. Now, you also have to take interest into account but it is so hard to predict what it will be like five years from now, let alone thirty.
Final numbers: you get a little more than $100,000 a year after taxes for the next 30 years
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Option 2 - Lump sum payment
This is much easier to calculate. You literally get 50% of the jackpot amount of $4,400,000 for a total of a one time payment of $2,200,000. If you divide this amount by 30 years, it only comes out to $73,333 a year, or exactly 19% less than you would get by taking annual installments.
Final numbers: you get a one time payment of $2,200,000 after taxes
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Which option would you choose and why?
Note: we are going to use the numbers for the state of Ohio for this exercise. In which case, the total advertised amount of the jackpot is $4.4 million.
-
Option 1 - Annual installments
For the annual installments option, you start with the jackpot amount of $4,400,000 and divide it by the number of years you will receive annual installments (30 years) and come up with a total of $146,666 a year before taxes. After you remove the amount in taxes (25% federal and 6% state for Ohio for a total of 31%) you end up with a total of $102,200 a year. Now, you also have to take interest into account but it is so hard to predict what it will be like five years from now, let alone thirty.
Final numbers: you get a little more than $100,000 a year after taxes for the next 30 years
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Option 2 - Lump sum payment
This is much easier to calculate. You literally get 50% of the jackpot amount of $4,400,000 for a total of a one time payment of $2,200,000. If you divide this amount by 30 years, it only comes out to $73,333 a year, or exactly 19% less than you would get by taking annual installments.
Final numbers: you get a one time payment of $2,200,000 after taxes
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Which option would you choose and why?
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