The lump sum option in the Lottery's instant tickets...not a great idea

The Lottery, beginning with this summer's games, are now offering the choice between taking your winnings in installments or being paid out in a lump sum.

For example, if you win $1 million, you can take either 20 payments per year of $50,000 each, or one payment of $650,000.

First, the installments:

• With taxes, at 25% federal and 5% state, you will receive a check for $35,000 per year.  
• Over 20 years, you will receive a total of $700,000.  
• Depending on your tax bracket, you will likely stay within or go up perhaps one or two tax brackets.  For instance, if you're in the 15% tax bracket, you will stay there or increase to either the 25% or 28% tax bracket.

Now, with the lump-sum:

• With taxes, at 25% federal and 5% state, you will receive a one-time check for $455,000.  
• The $650,000 represents 13 annuity checks at $50,000 apiece, meaning you will lose 7 annuity checks at $350,000 for this convenience.  
• Compared with the annuity of 20 checks, the loss will be $245,000 over the period of 20 years ($700,000 - $455,000), or about $12,250 a year.
• Accepting the $650,000 will also put you into the 35% tax bracket for that year, meaning you will likely pay much more in taxes.  For instance, if you're in the 15% tax bracket, you will be in the 35% tax bracket that year - and all taxes are progressive.

The higher the prize, the more you stand to lose.  If you won $10 million, the amounts I mentioned above go up by a factor of 10 - meaning you lose $3.5 million if you take the lump sum and receiving a check for $4,550,000.  On the other hand, taking the 20 checks at $350,000 each means you get $7,000,000.

So your best bet?  Having a steady, albeit, lower winnings check for 20 years is much better than instant gratification and losing a lot more money. 

It's partially correct that the Lottery is a math tax on the stupid - because it takes a stupid person to utter that phrase.