Question

Winning one of the big national lotteries provides a choice of how to receive the money. You can receive a much-reduced lump sum (like half or so) today, or the full amount in twenty annual payments starting today. Discuss how you can determine which financial deal is better. Also, what are the non-financial aspects to winning the lottery and how do they influence which option to take?

Answer 1

After winning the lottery, winners can receive prizes in two ways.One in a lump sum amount and other through an annuity that provides annual payments over a long period of time.

In both the option winner will get definitely there lottery amount. In lump sum payment is made in one time.It allows you to collect all of your money at one time. Where, as in annuity payment you will get your money in twenty annual payments. An annuity allows you to collect part of your money every year over a longer period of time.

Making An Investment :-

In the lump sum payment , you will get much less money than the lottery amount. The lump-sum option is good because you can get the half amount of money which you wisely invest your money in other place that give you higher return than taking money through annuity way. As in annual payment method you will get your full amount of money in twenty annual payments

Taxes on Lottery:-

Lottery Price are taxable income, and the amount depend on the payout option i.e.Lump sum or Annuity. If you receive your winnings in a lump sum, the money will be taxed it the year it’s win. While, an annuity payout will spread out taxes with every year payment. Choosing an annuity can be tax advantage because receiving smaller amount can put a winner in a lower tax rate.

In my point of view, I will choose lump sum amount rather than the annuity payment. In lump sum payment, I will get the money immediately and I can choose different investments option.