At any rate, one of my first tax compliance cases was a couple that won the lottery and had never paid any federal income taxes on the money. They spent it all on trips, restaurants, etc., – nothing that could really be repossessed – and they were being chased by the IRS for their share. It was a pretty sad story, really, because it’s hard to present a compelling and sympathetic case to the IRS for folks who just blew through a lot of money really quickly.

On the Powerball side, I suspect it’s administrative closure. They write a check and they’re done.

For example, the current Powerball jackpot is $161 million, with a Cash (Lump Sum) option of $80 million. Which means that if you choose annuity, they take the $80 million and invest it in an annuity, less the modest(!) first year payout of $2,870,646 (after takes, about 1.7 million). But if you have your heart set on a condo in San Diego on the water, 1.7 million might get you a 1900 square foot unit, and you’d have nothing left for food, property tax, etc.

So it seems like they should let you take what you want up front for big items first year (for some it might be $10 million out of the $80, others $20 million out of the $80), then conservatively put the rest into the 30 year annuity to give yourself the freedom from financial worry.

To Powerball, it wouldn’t make any difference. What does it matter to them if they buy an $80 annuity on your behalf, or give you the $80 million in cash, or use my blended option and give you $20 million up front and buy a $60 annuity? It’s 80 million out the door in any case.

Any thoughts?

I think the annuity is a very sensible choice. Most people aren’t sensible; after winning, a certain greed factor takes over, and now they feel they can even make more money.

The way I look at it, even winning the smallest Powerball jackpot means you are basically free from financial worries for 30 years. For the majority of winners, that takes them well into their retirement years anyway. $20 million is many times more than most folks could expect to earn in a 30 year period. So you should be free from financial worries with the annuity; now the problem with taking the “Lump Sum” is, instead of being free from problems, you just created for yourself a big one, namely, now what are you now going to do with it? How are you going to invest it? How do I maximize it, how do I keep from losing it?

Is that really the way to enjoy your newly found financial freedom? Is that really how you want to spend your day, your weeks, your months? You’re given the chance to never have to worry about money, yet you choose an option which forces you to think about it every day. Some say, just hire an advisor, but you’re still having to oversee everything, approve everything, make sure you’re not getting taken for a ride, etc. You could be steered into risky investments, things you don’t understand, and you can’t take your eye off the ball. That sound like more trouble than worth, and may be the reason a lot of ‘rich’ folks are not really that happy. Or end up like Willie Nelson.