What If Wednesday: You Won the Lottery. Now What?


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What If Wednesday: You Won the Lottery

In the What If Wednesday series, we transport to a hypothetical alternate-reality and watch life play out. And we do it on Wednesday, because alliteration.

Against your better judgement, you bought a lottery ticket for the $5 million dollar jackpot. Your crazy, impulsive friend kept taunting you with “But what if? What if you won?!” So during your lunch break, you stopped by the corner gas station and paid your dues to (what Dave Ramsey dubs) the “stupid tax” fund. You needed to grab some candy to get you through that afternoon’s department meeting anyways, so why not?

And now here you sit six hours later, staring at your flat screen TV in stunned silence as number after number matches up with your ticket. 4, 8, 15, 16, 23, 42. And then it hits you: You just won FIVE MILLION dollars!

After you do your signature victory dance that all your friends beg you never to do, and after you have a few days to let it all sink in, it’s time to make some decisions. Do you take the money in one lump sum? Or do you space it out into $250,000 increments for the next 20 years. Both options are pretax, of course. All hail the mighty Uncle Sam.

So will you take all the money now or have it doled out as a yearly cushion from now until 2033?

Our Response

When Johnny and I were paying off our school loans, we used Dave Ramsey’s debt snowball method. Per the plan, we paid off our smallest loans first, rather than our highest interest loans, smacking financial logic in the face. We did the snowball method because we needed that extra motivation of feeling like we were paying off our loans faster. And if we’d won the lotto back then, we probably would have chosen to take the $250,000 installments each year. It would be the safe option. And even if we royally screwed things up one year, we could count on that nice little payday allowance each January 1st.

But we ain’t those people anymore. We feel more confident in our ability to be financially self-disciplined, and so we’d take the lump sum. But beyond that sorta-kinda confidence to not blow it all at once, we’ve got other reasons, too. Over time, inflation and taxes are both likely to increase, which would make the yearly $250k worth less and less. But if we took the entire $5 million now, we could invest it, grow it, and put those green bills to work. So that’s exactly what we’d do.

But we would totally reconsider our choice if we knew they’d drop an eight-foot check off on our door every year that we could then take to the bank. Because that would be awesome, right?

p.s. This What if is an actual dilemma for many people when it comes to their retirement package from an employer. If that’s you, consider this a For Real Wednesday post and just substitute “lottery” for “shoot, I worked a lonnnng time and it’s time I get PAID!”

So Mr./Mrs. Millionaire: how would you like your cash divvied up?

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26 Comments

  • Reply Catherine September 18, 2013 at 7:17 am

    I would take a lump sum for a few reasons. 1) I’m in canada-no tax implications for lottp winnings so could invest more, earlier, for longer. 2) if you die you cannon will lottery winnings, would rather said money be in estate 3) I feel like after I let it sunk in I could allocate funds better and divide how I’d want in case I died-I’d give almost all of it away. 4) 250kwouldnt pay off all of my debt as it stands right now (mortgaga Incl) and I would want debt gone asap.

    • Reply Joanna September 19, 2013 at 1:51 pm

      Sounds like some solid logic, Catherine! And winning the lotto in Canada would be quite the hook up! Yowza!

  • Reply Sabrina @WorkItMsJackson September 18, 2013 at 7:24 am

    My husband and I have this conversation everytime the Powerball gets high (like $300 million high). We don’t play the lottery except for the occasional scratch off for fun (and by occasional, I mean I could count on two hands how many times I have actually bought one in my 29 years of life).

    Depending on how much we won, would depend on what exactly we did with it but we have both agreed that we would take the lump sum and invest most of it. We talked about funding the kid’s college education, paying off our parents’ houses, etc but it truly depended on how much we won.

  • Reply Michelle September 18, 2013 at 7:52 am

    I would take the lump sum and I would NOT let my picture or name be shared. I would pay off everything and then begin buying property for cash to generate passive income think: Denver, New York City, Miami, and South America. All tiny properties! Then I would work remote!

    • Reply Brian September 18, 2013 at 8:13 am

      You may not have a choice. Some states require at least your name to be made public. Not 100% sure which ones, but that is why we usually know the names of so many lottery winners.

      • Reply Michelle September 19, 2013 at 10:53 pm

        Bummer. Every time someone releases their name all of the relatives they didn’t know they had come out of the woodwork!

  • Reply Brian September 18, 2013 at 8:12 am

    I would take the lump sum. If we assume it is 50% of the ammount I would get $2.5M. Investing that in a dividend producing portfolio (probably using mostly dividend champions or aristocrats) you could easily get around a 4% yield that would continue to grow year over year (and more times than not, out paces inflation). Without reinvesting dividends you would be looking at $100K of truely passive income.

    As long as they are qualified dividends, you would be looking at a favorable tax rate compared to ordinary income. At that level you might want to do some back up withholding, especially if you don’t work a W-2 job anymore. It would probably also be worth it to consult an estate lawyer and work on a plan for passing on the money (at that level a trust would probably make some sense).

    • Reply Johnny September 23, 2013 at 2:21 am

      We’ll just hire you to handle our money if we win. Cool?

  • Reply Michelle September 18, 2013 at 8:13 am

    I would take the lump sum. You never know what may happen to your winnings in the future, and I definitely feel like I would be a good investor with it.

  • Reply Kali @CommonSenseMillennial September 18, 2013 at 8:19 am

    I’d take the lump sum and immediately put it in my investment accounts! I don’t think our lifestyle would change much, other than we’d probably pursue different jobs (ones that don’t pay as much as our current 9-to-5, but are much more rewarding and fun) that would allow for lots of travel. Winning the lottery for us would be like winning financial security, not the ability to buy lots of luxuries and stuff :)

    • Reply Johnny September 23, 2013 at 2:39 am

      Well stated. And while I’d like to think our lifestyle wouldn’t change too too much, I would like to up our Personal spending money from $25 to, say, $50. Living on the edge, I know.

  • Reply jolene @ finishedby45 September 18, 2013 at 9:42 am

    I’d definitely take the lump sum, pay off my mortgage and student loan, and start investing immediately. Of course, I’d also take a good chunk of the money and put it in savings accounts, just in case the stock market and real estate crashed.

    I’m also a little crazy and would buy three or four pieces of extremely good jewelry that I could keep on my person. During the holocaust, some wealthy women who had lost all of their cash and had no homes were heard to have traded huge diamond rings for pints of milk. Even when money and home are gone, gold and diamonds still seem to have value. But I wouldn’t spend more than $100,000 on them.

    • Reply Johnny September 23, 2013 at 2:44 am

      Joanna really likes your idea of getting some nice pieces of jewelry. My only concern is that I don’t think I’d ever see the return on my investment since she’d guard them to the death from ever being bartered or sold.

  • Reply carlotta September 18, 2013 at 11:08 am

    I would take the lump sum, pay off my sisters mortage (small apt in Rome costs a loooot!), invest some in my nephews name, help all “my” babies at the orphanage in China and then, probably, quit my job. I’m not sure this was your question :D, but you gave me an input!

    • Reply Johnny September 23, 2013 at 2:45 am

      Can I be your sister? Living in Rome AND you’d pay off my mortgage? Awesome!

  • Reply Chadnudj September 18, 2013 at 12:03 pm

    You played those numbers and won?

    The money is obviously cursed. Give it away as quickly as possible.

    Seriously, though? Always take the lump sum (it’s worth more, once you factor in inflation/potential interest gains).

    I would then spend whatever it takes to get my wife and I and my mom fully out of debt (i.e. pay off our mortgages/student loans), and then invest every other penny in a low-cost, 60-40 stocks-to-bonds fund (I’d be more conservative here than with my current allocation, since the goal would be to not lose anything). Each year, I’d take half of the dividends and re-invest it, and half would become spending/fun money to do/buy whatever we want. That way, we’d grow the pot AND get to have some fun.

    • Reply Johnny September 23, 2013 at 2:48 am

      Glad someone caught the LOST reference. I like the half dividends re-invested, half spent method. I’d rather spend it while I’m younger than when I’m old and decrepit.

  • Reply Insourcelife September 18, 2013 at 12:15 pm

    Easy… Pay off mortgage, put the rest into Vanguard Stock and Bond index funds. DONE.

  • Reply Kasey @ Debt Perception September 18, 2013 at 12:17 pm

    I would take the lump sum. I’d first pay off my debts, help my parents out with their debts, buy furniture (no more plastic storage!), take my family to a Packer game, my mom and nieces on a cruise, then buy an income property, help my mom and uncle start up their dream restaurant, then save and invest the rest.

    • Reply Johnny September 23, 2013 at 2:50 am

      Lots of family stuff. Love it. Especially the Packers game.

  • Reply Rob September 18, 2013 at 1:16 pm

    A no-brainer for me, guys. I’d take the whole lottery enchelada – and 100% tax free too (the benefits of being a Canuk – lol). Then, since my name would be publicized, I’d put 95% of it in safe secure long term investments (where I’d only receive regular annual investment interest income) and take the rest for an extended 6-month out of country holiday – away from all the in-laws and outlaws who’d then be after me for my loot. :-)

  • Reply The Norwegian Girl September 18, 2013 at 2:11 pm

    $5 million dollars? That´s like 30 Million Norwegian Kroner!! I guess the first thing I´d do, is to pay of my parents`debt and buy them an RV (it´s their dream to travel around in Europe with an RV).., then I´d buy myself a nice house/apartment and a car for BF. And of course pay of my student debt. The rest, which would still be like a loooooot of money, I would probably put in a high interest savings account, while figuring out how to invest them. Probably some real estate.

    • Reply Johnny September 23, 2013 at 2:52 am

      30 million Norweigan Kroner sounds wayyyy cooler than $5 million dollars. I’d probably just exchange my USD for your Kroner, because that’s basically sextupling your money, right?! :)

  • Reply moneystepper September 18, 2013 at 3:22 pm

    I remember this being a question in A-level statistics.

    And the RIGHT ANSWER was take to the money today.

  • Reply E.M. September 18, 2013 at 11:46 pm

    I would take the lump sum, immediately pay off my student loan debt, my boyfriend’s student loan debt, and my parent’s debt (I think they’ve learned better by now). I don’t have specific numbers after that, but ideally I’d like to buy a house, rental properties, travel, give some to good causes, and invest the rest. I’d probably buy decent used cars for family members who are in the market, too, and get mine all fixed up so it runs like new. Traveling is the biggest thing for me, as I would love the opportunity to discover new cultures around the world. So if I could just keep traveling that would be pretty awesome.

    • Reply Johnny September 23, 2013 at 2:54 am

      Traveling would be at the top of our list, too. Since we’ve never been anywhere outside of the good ol’ USA, we’d probably close our eyes, spin a globe, and see where our finger landed. And then we’d keep doing it until we stopped landing smack dab in the middle of the ocean. :)

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