By Heather Brown

MINNEAPOLIS (WCCO) — This Wednesday’s Powerball jackpot is worth a world-record $1.4 billion.  That’s the amount someone would win if they took annual payments over the next 30 years.

But, if the winner took all the money right away, that sum adds up to $868 million. All of these numbers are before taxes. So, that has Mike from Plymouth wanting to know: Should you take the annuity or the lump sum?  Good Question.

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According to the Minnesota State Lottery, all 15 Powerball winners in the state since 1998 have chosen the lump sum option.

“I’d take the money and run,” says Brian Vnak, director of Integrated Advice Strategies at Wealth Enhancement Group in Plymouth. “I’d pay the taxes, enjoy it, control it and make a difference in the world.”

Vnak says there are three major things to consider when deciding between annuity and lump sum payments.

First, people would want to consider the tax implications.  With the lump sum, a winner would pay taxes upfront.  After paying all state and federal taxes on an $868 million cash payout, Vnak estimates a Minnesota winner would ultimately take home $440 million. If tax rates were to stay the same over the next 30 years, a winner who takes the annuity payments would ultimately end up with $753 million over time.

(Annuity payments are weighted over 30 years.  The first payment would be $21 million and increase a small percentage each year.  The last payment would by $86 million.)

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“Is the tax you pay today less than the tax you pay in the future?” says Vnak. “We don’t know that. It’s not set in place, but obviously there’s lots of proposals in place to raise taxes on the highest earners in the country.”

The second issue would be investments and their rate of return.  Vnak ran some numbers for WCCO.

Assuming tax rates stay the same and nothing is spent (both lump sum and annuity are invested), he found a break-even rate of return to be approximately 3.6%.

According to research from Wealth Enhancement Advisory Services, the average annual return across all 30-year periods since 1973 was 10.19 percent.

The final component to consider, says Vnak, would be interest rates and inflation – do you think they’ll rise?  Estate taxes could also come into play.  The Minnesota Lottery says if the annuity winner dies before the 30 years is up, the annuity is paid to the heirs.

And, of course, the financial behavior of the winner should weigh on the decision.  According to a study from the National Endowment for Financial Education, 70 percent of people who come into sudden money are broke within a few years.

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“The more irresponsible you are, the more help you need,” says Vnak. “Even if you are responsible, your life is so different now. The issues of your life no longer are, you’re going to have all sorts of new issues.”

Heather Brown