Would you rather be a millionaire or have secure, reliable passive income for life? This is a difficult choice that many lucky lottery winners face time and time again. While the prospect of a seven-figure payout is tempting, Brenda Aubin-Vega, 20, of Quebec, Canada, recently decided to take the recurring payment option instead.
After scratching three piggy bank symbols on her Gagnant à Vie ticket, Aubin-Vega was shocked to learn she had won the game’s top prize. “I couldn’t believe my eyes! I checked my ticket over and over,” she told Yahoo News Canada (1).
After calling her father and taking time off from work, Aubin-Vega reached out to Loto-Québec to let them know she was claiming a $1,000 weekly annuity, with a $1 million lump sum also available.
The decision generated derision on social media, with Reddit commenters insisting the advance payment was a rational move. The response underscores the broader debate about whether large windfalls are superior to guaranteed income.
Here are some pros and cons of Aubin-Vega’s annuity approach.
Taxes are, perhaps, the most important factor to consider if you’re ever faced with the choice between a large windfall or an annuity. Gambling income is fully taxable according to the Internal Revenue Service (IRS) (2). Many US winners also face state and local taxes on their lottery winnings.
A person who wins the $1.5 billion Powerball jackpot on December 17 will take home only $516.7 million after federal taxes and possibly more depending on their home state (3).
Fortunately for Aubin-Vega, she is Canadian and faces no taxes on winning the lottery (4). In other words, he could claim $1 million without any taxes or penalties. However, he then faces the difficult decision of making that lump sum investment.
With weekly payments of $1,000, Aubin-Vega has effectively locked in a 5.2% annual yield on his jackpot. Since the payments are provided by the Canadian province of Quebec, this annual return is as safe as the yield on government treasury bonds. Canada’s 10-year bond currently offers a 3.4% yield, making Aubin-Vega’s move seem very financially savvy (5).
Simply put, by taking weekly payments, she secured an asset safer than the stock market and more attractive than the bond market.
Aubin-Vega’s age is another factor that makes the weekly payout even more attractive. By collecting $1,000 a week, she reaches the $1 million milestone at age 39 and will eventually reach $3.1 million in total payouts at age 80. If she invests it in weekly payments instead of spending it, she can meet both milestones years earlier.
Finally, taking a modest weekly payout instead of a lucrative million-dollar jackpot could make Aubin-Vega less vulnerable to bad actors. As one Redditor put it: “The benefit of not taking a lump sum is that the vultures don’t start circling for payment. It’s the only way you can win millions and tell people.”
However, there are some downsides to plunking down a million dollars.
Read more: Vanguard reveals what could be coming for US stocks, and it’s ringing alarm bells for retirees. Here’s why and how to protect yourself
One of the downsides to choosing a weekly payout instead of an upfront jackpot is the lack of flexibility. An annuity is permanent, but the $1 million cash can be invested freely in a wide range of asset classes, some of which could offer better growth opportunities.
For example, a $1 million investment in a low-cost index fund and assuming a 7% annual growth rate could turn Aubin-Vega into a millionaire in about 10 years. During that time, 4% annual withdrawals will provide additional cash flow.
Inflation is another downside risk for him. The purchasing power of his weekly payments has gradually eroded over time. Assuming annual inflation of 2%, a weekly $1,000 payment could be worth less than half what Aubin-Vega is worth today by the time Aubin-Vega is 56 years old.
Finally, Aubin-Vega’s decision also eliminates her bragging rights. Being a millionaire in your late 30s is not nearly as impressive as being a millionaire 20 years older. For some lucky lottery winners, taking the money upfront is reason enough.
We rely only on vetted sources and reliable third-party reporting. For details, see our Editorial ethics and guidelines.
Yahoo! News (1); IRS (2); Yahoo! Finance (3); Government of Canada (4); CNBC (5)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
