Question

"Winning the Jackpot!"

It’s probably one of the most fun ideas to think about - winning the lottery! So, let’s have some fun. Suppose you win the Powerball when the jackpot is at $300,000,000. You are given the option of a lump sum payment or an annuity. The lump sum means receiving the entire cash value at once, but the lump sum will be less than the $300,000,000. The annuity will be paid out in 30 payments over 29 years, which increase by 5% each year to keep up with the cost of living.

• In light of the above scenario, would you take the lump sum payout? Or would you take an annuity, and receive the payments over time? Provide a rationale for your response.

Answer 1

If one has to choose from a lump sum payment or annuity after a winning a lottery of $300,000,000, one should go for annuity rather than lump sum receipt.

One of the reason is that it is possible that if we choose lump sum we may get excited and use the entire amount of money in one go or during short span. Also we may not be clear as to how to use such a huge amount of money. However if we choose annuity there are 2 advantages, one is we will get a fixed amount of money every year for 29 years and hence we can effectively expense it use it or invest it to derive other income (interest income) and second is we will not expend the entire amount in one go as we don't have the full amount but only a certain amount.

Annuity has one backlog that amount received over a period of time will be lesser than amount received through lump sum. However with proper planning and investment of amount received through annuity we can very well increase our receipts in case of an annuity. Annual receipts will also increase by 5% to keep up with cost of living which is also advantageous.

Through above discussion it is proved that benefits of an annuity outweighs its disadvantages and hence one should go for annuity.

(This is a subjective question. Answers may differ from person to person.)