What to do if you win the $2-billion Powerball lottery

Should you take a smaller lump sum or annual payments?



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The Powerball lottery went unclaimed last Saturday and the jackpot climbed to US$1.5 billion, or about CA$2.1 billion and plenty of Canadians are buying tickets whether they’re taking a quick trip across the border or buying tickets online from sites like theLotter or from this Toronto bakery in the hopes that luck will be on their side during the Wednesday number draw.

The odds of winning are staggering—at about one in 292 million, according to Powerball.com. (You’re way more likely to get hit by lightning). But it raises a good question: What would you do if you won (other than celebrate)? Winners have two options when it comes to collecting their new, absolutely enormous windfall. They can either take a reduced lump sum all at once of US$930 million (CA$1.3 billion) or take annual payments over 29 years that are projected to yield you a total of US$1.5 billion. The reason the total amount received over the years is larger than the lump sum is because it’s been adjusted for inflation, making it an eye-catching figure. And of course, remember that the U.S. Federal government will tax you 30% on your loot either way.

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One smart thing to do, from a financial perspective, is to take the lump sum although it may be lower than the final cost advertised and invest it. Your newfound wealth will grow even more over the years, says CFP Jason Heath. “Whether it’s a pension or lottery winnings, today’s low interest rate causes the calculation of a lump sum to be very high and very advantageous. From a strictly financial perspective, I think one would probably be better to take a lump sum payment from a lottery.”

From a psychological perspective, though, especially for an amount of money this big, he says it may be better to take an annual payment over time (that’ll still be millions per year) rather than having to manage all that money at once and risk being another sad lotto winner.

“It’d be tough to blow a billion dollars,” says Heath. But for people who have never had this much money and are experiencing a financial shock (albeit the good kind), they’re probably better off having 28 chances to make mistakes with their money with the knowledge that there’s more coming the next year.

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“In much the same way investment advisors and the investment industry preach dollar-cost-averaging and investing small increments of money over a long period of time, as opposed to one lump sum of money all at once, I think that just goes to justify the benefit of taking the payments over the long run,” says Heath, “Especially if one didn’t have a lot of financial aptitude.”

However, if you do decide to go with the lump sum, it’s important to carve out the amount of money you’d realistically need to maintain a reasonable standard of living (no, the purchase and upkeep of 19 Ferraris doesn’t count). The rest is money that you can use to pay off your mortgage and other debts and put towards conservative investments.

“The first thing you should do in a windfall situation is nothing,” says Heath. “Step back, assess the situation, assess your life. Don’t be in a rush to make financial choices and decisions just because you have cash burning a hole in your pocket.”

Any investment moves should be made slow and steady and purposefully—so maybe having 29 years to learn the ropes while still swimming in millions isn’t such a bad idea.

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