If you're lucky enough to win Powerball's current $1.4 billion jackpot — the third-highest ever — think carefully about your choice of payout. The best choice may not be as obvious as it seems.
Powerball's next draw is Saturday night at 10:59 p.m. E.T. If you win, you can choose between an upfront cash lump sum and an annuity spread out over 30 years.
Most jackpot winners claim the upfront lump sum, since they'll get the majority of the cash right away. Since the beginning of last year, all but one Powerball jackpot winner chose this option, the Multi-State Lottery Association tells CNBC Make It.
But that doesn't mean it's necessarily the right choice for you. Here's why.
The upfront payout is quicker — but the annuity payout can be safer
When you choose the 30-year annuity payout, you win the full listed jackpot amount. After federal taxes, a $1.4 billion jackpot would give you roughly $29.44 million per year, according to usamega.com. Most states charge additional taxes on lottery winnings — eight states don't.
In contrast, winners who choose the lump sum take home slightly less than half the listed jackpot amount. For a $1.4 billion jackpot, you'd take home $386.82 million after federal taxes.
Money Report
Most winners still choose the lump sum option because the winnings can be invested right away. With compound interest, a "middle-of-the road portfolio should double in around 10 years," says Dennis Hunt, a certified financial planner in Florida.
But that strategy can be a "mistake," since returns on investments aren't guaranteed, says George Gagliardi, a CFP in Massachusetts.
"The potential for mismanagement, poor investment decisions or falling victim to scams is real — and can be financially devastating," adds Jeff Rose, a CFP and founder of financial advice blog GoodFinancialCents.com. "Opting for the annuity, in contrast, provides a structured and steady income, reducing the risk of mismanagement and providing a stable financial future over a longer period."
Taking an annuity could also protect yourself from spending all of your winnings right away, a common pitfall for lottery winners. "If having a lot of money was a guarantee to never run out of money, why do millionaire athletes go bankrupt?" says Nicholas Bunio, a CFP in Pennsylvania.
Whatever you choose, consider consulting with a financial planner before you claim the prize. They can walk you through the tax and family considerations that will influence which payout is best for you.
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