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Lottery Payouts and Investment Annuities: What You Need to Know

When it comes to retirement and feeling secure in your future, annuities can be a great choice for many. They provide the peace of mind that comes with knowing you can be financially secure as you age, and may even be able to set your family up for success upon your passing. Here we discuss how investment annuities work and your option if you are the fortunate recipient of a lottery payout.

What Is an Investment Annuity?

Image via Unsplash by Vladimir Solomyani

An investment annuity is a way for you to secure monthly payouts over your lifetime. Typically, you would enter into a contract with an insurance company wherein you pay the insurance company a lump sum and in return, they agree to grow your investment and make regular payments back to you on an agreed-upon schedule. As the name implies, this type of annuity serves as an investment in your future.

The two main types of investment annuities include:

Fixed Annuities

A fixed annuity works by paying you an interest rate on your investment based on your initial contribution, your annual contribution, your age, and the current interest rates. Your fixed rate annuity payment will also depend on the terms of your contract, which can vary by the insurance company, so it’s best to look at the contract details. This fixed rate of return can provide you with a steady stream of income that is tax-deferred and more predictable than other types of annuities.

An example of a fixed annuity would be if you received a set (and predictable) $1,000 per month over the next 20 years.

Variable Annuities

By contrast, the payment you receive from your variable annuity will depend on how your investments are performing and the fluctuation in insurance rates throughout the annuity terms. Although you are essentially selecting to invest in mutual funds and their success can vary, there are some variable annuity terms that will still guarantee your original investment. For example, if you invested $120,000, but over the course of the terms your investment is now only worth $90,000, you will still receive your full $120,000 when the annuity ends. Just as with a fixed annuity, these terms vary by provider.

Annuity Options

Along with different annuity types, there are additional ways to break those down even further:

  • Initial investment: Choose to pay for your annuity in one lump sum or in payments.
  • Payout: You can opt for an immediate annuity where you start receiving payouts on your investment right away or select a deferment date when payments will begin.
  • Length: A lifetime annuity will make payments to you until your death, whereas a fixed period annuity’s payouts will end after a certain length of time.

You may want to base the terms you choose here on your financial need and your other retirement options.

How a Lottery Payout Works

If you are the lucky winner of a lottery, congratulations! This is probably an unexpected, yet exciting time, and although your celebration is warranted, you may want to immediately consider how the payouts work and what options are best for you.

Some of the big players in lottery, such as Powerball and Mega Millions, offer winners the option of collecting their winnings in one large sum, or in payments over time (also an annuity). Their terms may vary. For example, your lottery annuity with Powerball winnings will pay you annual payments over the next 30 years and payments start immediately, making this option a fixed immediate annuity. Here are a couple of items to think about if you are eligible for a lottery payout:

Total Payout

After winning, you’ll have to quickly decide how you want to receive your payout, either in a lump sum or as an annuity. In the lump sum option, you’ll receive your winnings in one payment, minus taxes, and be able to use your funds immediately upon receiving them. In this way, you’ll be able to make non-annuity investments, purchase any coveted high-priced items, or gift large sums of money to loved ones.

With the annuity payment option, your winnings will be invested and paid out to you over a defined time. In most cases, it’s 30 years, but this can vary by state and lottery program. However, by taking the annuity option, you’ll receive a total payout that is closer to the lottery jackpot than if you were to choose the lump sum payout. This is because your annuity includes investments that earn interest and gain you more earnings.

An annuity may be the choice for you if you want to keep most of your winnings while also protecting the money from being spent all at once. A lump-sum choice may be right for you if you want to more immediately invest in higher-yield options, such as real estate, that you may not be able to comfortably cover with only your annual payments.

Taxes

If you choose to take the one-time cash payout option, federal and state agencies will collect taxes before you receive the funds. Therefore, with your winnings, you’re free to spend the money however you’d like without tax penalty. A lottery annuity is subject to taxes throughout the life of the annuity, with the income tax rate fluctuating each year, so you’ll pay the appropriate taxes on your annuity payments when you receive it.

Selling a Lottery Annuity

Depending on the state in which you won the lottery and the lottery program’s terms, you may be able to sell your lottery annuity payments. You may want to do this if there is a family or medical emergency, or if you have a once-in-a-lifetime chance at a solid investment. However, a judge would have to approve this choice and decide if this option is in your best interest. There are settlement companies you can work with to sell your future lottery annuity payments.

Investment and lottery annuities can be a solid retirement choice, but selling those annuities may also be the best option for you as your financial situation and personal needs change. Consulting an expert in the field can help give you guidance as to what your next steps should be.

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