What Do Lottery Winners and People Near Retirement Have in Common?
Winning the lottery actually has a lot in common with being near retirement age:
- You can quit working
- You have finite financial resources at your disposal (Really finite for most of us; in fact, many of us feel like we can not retire unless we actually do win the lottery.)
- It is a time to take stock of what is really important to you
- You have a lot of complex financial decisions to make
One of the biggest decisions that both retirees and lottery winners need to make has to do with cashing in on the winnings (in the case of lottery winners) or savings (for retirees).
Lump-Sum Winnings or Take the Money in Installments?
Most lottery winners have to make an immediate decision to either take their prize money in one lump sum or as monthly payments for a set period of time (usually 30 years).
For example, a $1.5 billion Powerball winner can take their prize money as $930 million in a lump sum or as $1.5 billion in installments over the next 30 years.
If you want the expert opinion, many financial advisors would actually recommend that lottery winners take the annuitized payments for some of the following reasons:
- There are tax advantages to taking the money in installments
- In the case of the Powerball money management, they can guarantee the money to you instead of you making your own investment decisions (which could either beat the Powerball returns or not).
- You are assured that you won’t blow all your money and that there will always be another check headed your way.
What About Retirement Savings?
Most financial advisors give the same advice to retirees as they give to lottery winners; instead of thinking about your retirement savings as a big (or maybe not quite big enough) lump sum, reframe your thinking to imagine your retirement savings as income (preferably lifetime income).
Buying a lifetime annuity is one sure-fire way to convert your savings into income. An annuity has similar benefits to annuitized lottery winnings:
- There can be tax advantages
- You can be guaranteed a certain return on your money
- You are assured that the income will be there as you grow old, no matter what happens to the stock market.
These factors can make annuities be a very compelling way to make sure you don’t run out of money in retirement. But there are many pros and cons to the products. The trick is in making sure you choose the right variety of annuity for your particular needs.
A few questions you will want to consider include:
- Will the annuity cover your spouse after you die?
- Does it have inflation protection?
- Do you want to guarantee your investment return?
Is an Annuity Right for Your Retirement?
The decision to get an annuity for retirement is not simple, it should be made in the context of your overall financial situation. Do you have a good understanding of your current resources: savings, home equity, family, Social Security, etc.? What do those resources look like now? What will they look like in the future?
You can estimate your annuity income with the Annuity Calculator.
Or, better yet, use the NewRetirement Retirement Calculator to see what happens if you buy an annuity. Once you are in the tool, you will be able to see what happens to your cash flow and net worth, now and throughout your lifetime, if you were to buy an annuity.
No Matter What You Decide, Make Sure You Answer the Really Big Questions!
Whether you have just won millions of dollars in the lottery or you are simply considering how you are going to afford retirement, the really big questions have less to do with money and more to do with how do you want to spend your time.
No matter your wealth, you can prioritize and make trade-offs that enable you to do the things that are important to you.