Is there a big difference between taking a lottery winning via payments over a series of years vs. taking it all in cash at once?

The answer really depends on how you invest your cash. If you opt out of Cash, you only get 50% of the money you win. You only get 100% of it with annual option. You have to pay taxes on both.

Lets do some calculations by assuming 40% tax rate and 5% interest on Fixed or Risk Free CD (Certificate of Deposit).

Let say you win $1,000,000 (One Million Dollars).

**Annuity**

You will be paid $1,000,000 over 25 years with annuity option. Each year you will get $40,000. Factoring out 40% tax, your net winning for each year will be $24,000. Which leads to your winnings over 25 years totaling at $600,000.

Lets assume you will invest $24,000 each year in a 5% CD. Your money will be worth $1,279,145.99 after 25 years. Which is approximately 1.28 million dollars.

__Variables:__

Current Principle: $24,000

Annual Addition: $24,000

Years to Grow: 25 years

Interest Rate: 5%

Compound Interest: 365 times annually

**Cash**

Your cash option will be $500,000 and with 40% tax rate (35% federal and 5% State tax) your net winnings will be $300,000.

Lets assume you will invest $300,000 in a CD over 25 years. Your money will be worth $1,047,013.25 after 25 years. Which is approximately 1.05 million dollars.

__Variables:__

Current Principle: $300,000

Annual Addition: $0

Years to Grow: 25 years

Interest Rate: 5%

Compound Interest: 365 times annually

Which is not as much as Annuity. This means that we need more interest on our big cash principle to beat the annuity. Much much interest?

**Total money after 25 years at 7.3% return while keeping other valiables fixed**

Cash Option: $1,860,498.98

Annuity: $1,859,317.81

**Total money after 25 years at 10% return while keeping other valiables fixed**

Cash Option: $3,653,497.00

Annuity: $2,975,812.38

**Conclusion**

It is better to take the annuity option at 5% annual return. However, with some other calculations I found out that the break even return rate is 7.3%. If you can be sure to earn more than 7.3% on your investment then it is better to elect cash option than annual payments. However, if you are not sure you will be able to earn 7.3% annual return, then choosing annuity option is a wise decision.

*This article provides an unprofessional advise. The author of this article does not hold any liability resulting from the information obtained from this article.*

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