By Brad Tuttle
October 24, 2018

The Mega Millions jackpot for Tuesday, October 23, was originally estimated at $1.6 billion—which would have been the biggest Mega Millions grand prize ever and the highest lottery jackpot in U.S. history, period.

The grand prize was overestimated, however, and the ticket sold in South Carolina with all six winning Mega Millions numbers wound up with a $1.537 billion jackpot. That is easily the highest Mega Millions jackpot ever — topping the previous record of $656 million in 2012 — but is slightly below the $1.586 billion Powerball jackpot from early 2016. That still stands as the all-time highest lottery jackpot ever in the U.S.

Record-high jackpot or not, $1.537 billion is an insanely huge amount of money. And the individual with the winning Mega Millions ticket will have to make a big decision: Take the lump sum or annual payments?

The $1.537 billion Mega Millions jackpot is the total if the winner elects to get the money paid out over the course of 30 years, with an average annual payment of $51 million (pre-tax), according to USAMega.com. Lotteries also give winners the option of taking one-time lump sum payment upfront, though the amount is always smaller; in the case of the $1.537 billion jackpot, the lump sum payment option comes to $878 million.

The Mega Millions winner would be subject to taxes, of course, bringing down the takeaway significantly. The lump sum $878 million Mega Millions jackpot after the top 37% federal tax rate is applied would be approximately $553 million. As for the annuity, federal taxes would bring a $51 million annual payment down to around $32 million.

Depending on where you live, you may have to pay state taxes as well. In South Carolina, for example, where the winning Mega Millions ticket was sold, there is a 7% state income tax on the highest earners. That brings the lump sum down to $492 million after taxes, while you’d get an average of just under $29 million each year after taxes with the annual payment option.

Add up those annual payments (after taxes from the federal government and South Carolina), and the total comes to $856 million after 30 years. That’s far more than the one-time lump sum payout of $492 million after state and federal taxes. Even so, many would argue that the lump sum is a better deal financially, what with how much interest the jackpot could earn over time if it’s invested well.

But the question of whether the lump sum or annuity is better for lottery winners is one that should be addressed in financial and psychological terms. Here’s what you should consider.

Why It Is Smarter for Lottery Winners to Take the Lump Sum

The math is fairly clear on whether lottery winners should take the annuity or lump sum: The lump sum is the better deal, assuming you don’t blow most of the money in a hurry and invest at least a big chunk of it instead.

No lottery winner is going to save and invest all of their winnings, of course. But say, of the $492 million jackpot after taxes in South Carolina, you decided to invest $475 million and not touch it. That investment would amount to more than $2 billion over the course of 30 years, after factoring in compound interest and a conservative rate of return of 5%.

Even if a lottery winner goes for annual payments and invests most of their take each year, the grand total would be less over the course of 30 years compared to the lump sum.

How could this be? Well, the annual payment schedule calls for lottery winners to receive smaller payments in the first years of the annuity and larger payments down the line. Because so much of the lottery jackpot is received toward the end of the annual payments schedule, there is less time for compound interest to take effect and boost the winner’s nest egg.

Why It Is Smarter for Lottery Winners to Take Annual Payments

So the lump sum is smarter than the annuity for lottery winners, right? Maybe not.

Even if the lump sum makes more sense financially, the annuity may be wiser in light of human nature and the long, depressing history of lottery jackpot winners going broke and ruining their lives after hitting it big.

“There are lots of lottery winners who you never hear about who do just fine, but there are others who ruin their finances, relationships, and lives after they win,” certified financial planner Robert Pagliarini explained at Investopedia. “For them, having less access to the full amount of the win is better.”

Most lottery winners opt for the lump sum. But going that route comes with the risk of spending most or all of the jackpot winnings in a mad rush. A lottery winner who elects to receive annual payments over the lump sum still runs the risk of spending money wildly — but the damage you can do each year is limited, and you’re guaranteed to receive a fat new check every year over the course of three decades.

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