Lump sum or thirty payments
A jackpot is advertised as the annuity total: what you receive if you take it in instalments over three decades. The cash option is a smaller figure available immediately. This calculator shows both after tax, which is where the decision actually sits.
Worked example: a $100,000,000 jackpot
- Cash option at 60% of the advertised figure: $60,000,000 gross
- After 37% federal tax: $37,800,000
- Annuity: 30 payments of $2,100,000 after tax, totalling $63,000,000
The annuity pays $25.2m more in nominal terms. Whether it is worth more depends entirely on what the lump sum earns in the meantime.
The break-even return
| Lump sum invested at | Value after 30 years | Beats annuity? |
|---|---|---|
| 1% | $51.0m | No |
| 3% | $91.7m | Yes |
| 5% | $163.4m | Yes |
| 7% | $287.8m | Yes |
Anything above roughly 2% a year and the lump sum wins on arithmetic. That is a low bar, which is why financial advisers usually favour it.
The argument for the annuity anyway
The arithmetic assumes the money is invested and left alone. Most large lottery winners do not do that, and the annuity is structurally protective: it cannot be spent early, cannot be lost in one bad decision, and resets every January.
It also spreads the tax. Thirty payments of $3.3m gross may each sit in a lower bracket than a single $60m receipt, depending on the rules in force. Against that, the payment schedule is fixed and inflation erodes it — at 2%, the final payment buys what $1.16m buys today.
What this calculator leaves out
State lottery tax, which ranges from zero in several states to over 10% in New York. Also the fact that annuity instalments usually escalate rather than staying level, and that the cash percentage varies with prevailing interest rates.
Why the cash option is smaller
The advertised jackpot is not money the lottery holds. It is what a portfolio of government bonds would pay out over thirty years if the cash sum were invested today.
So the cash option is the present value of the annuity, discounted at prevailing rates. When rates rise the cash percentage falls, because a smaller sum now buys the same future stream. The 60% in this example is typical of a moderate-rate environment; it has been as high as 70% and as low as 50%.
The tax figure is a simplification
The 37% used here is the top federal marginal rate, but 24% is withheld at source and the balance falls due at filing. On a $60m receipt the shortfall is roughly $7.8m, and it is owed whether or not the money is still there.
State tax then applies on top, ranging from nothing in Florida, Texas and California on lottery winnings to more than 10% in New York. A New York winner taking the lump sum keeps closer to $32m than the $37.8m shown above.
Related calculators
- Lottery tax calculator — the full deduction including state
- Present value calculator — what the 30 payments are worth today
- Inflation calculator — what the final payment will buy