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Powerball: If you win, should you take a lump sum or 25-year payout?

Don't Waste Your Money

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Let me start by saying that you are probably not going to win this week's $550 million record Powerball jackpot.

At 175 million to one odds, you have better odds of being struck by lightning twice in a year.

But for the sake of dreaming, and perhaps smaller lotto jackpots in the future, it's good to know the pros and cons of the biggest decision you will have to make:  lump sump or gradual 25 year payout?

Lump Sum Option

This is the most popular option for lotto winners historically, and why not? You get your hands on all that cold hard cash all at once. Mine, mine, mine, mine, mine!

It's not going anywhere, and no one will take it away from you or come up with some new tax 5 years down the road that reduces what is rightfully yours. So there are no "what if''s" to ponder.

A lump sump payout on a $550 million jackpot is a mere $300 million cash. Most people would be OK with that.

However, the lump sum leads to a much greater risk of blowing your jackpot, once you buy that mansion, vacation home, 3 new cars, and start handing out money to your 25 BFF's, your parents, children, and your third cousin's brother's sister's uncle, twice removed.

SmartMoney magazine says 1 percent of all lotto winners file bankruptcy every year.

It cites a man who blew a $16 million jackpot, and was bankrupt at the time of his death.

Installment Option

For those worried about blowing it all (very possible in winnings of $10 million or less), the 25 year installment option guarantees you a healthy income for the rest of your life.  How does $19 million a year sound?

And if you are most interested in bequeathing the money to your children and grandchildren, installments could be the better option:  they will be taxed at the inheritance tax rate, not the top income tax rate you will be hit with if you take it in a lump sum. So they will get more money.

Installment payouts force winners to be disciplined, which is a good thing if you win just a few million dollars. 

Once you start buying homes and paying relatives, you would be amazed at how fast a couple of million bucks can go.

You can't blow your winnings on that shiny red Corvette if you take the long term payout. Which leads to the final question no one can answer:  why do lotto winners tend to buy red Corvettes?

As always, don't waste your money.

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