By Phil West, WCI ContributorLet’s say that you’ve beat the astronomical odds of winning the lottery and that you’ve somehow seized upon the magic combination of numbers that brings you a lottery windfall. (For Powerball winners, you’re beating odds of 292.2 million to 1, and for Mega Millions winners, it’s even greater at 302.6 million to 1.)
Depending on the size of the jackpot and your decision on whether to take a lump sum or the annual annuity, you could be looking at a major windfall or something that more resembles the physician's salary that you're currently achieving. This begs the question in our title: Would you quit your job as a lottery winner? Or should you quit your job as a lottery winner?
What Should You Do If You Win the Lottery?
First of all, you have to choose whether you want to take your entire winnings as one lump sum or to go with the annuity option—which spreads your payout over 29 years with 30 payments, each increasing 5% each year. Ostensibly, that tweaks for inflation.
As Forbes noted in its article advising lottery winners, “With a $750 million jackpot, Californians, for example, would get around $8.6 million in their first annuity payment after federal taxes, and would end up with an annual payout of more than $35 million after federal tax in year 30.”
But as an Axios article from 2022 pointed out, no one’s gone the annuity route since 2014. Choosing the lump sum gets you about half the announced sum, and since lottery winnings are taxable, there’s a greater tax hit on that single lump sum. But then you also have the advantage of determining what slice of the pie you want to invest vs. what slice of the pie you’d like to retain for your living expenses and discretionary spending.
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How Much Tax Will I Pay on Lottery Winnings?
The tax rate on lottery winnings of $5,000 or more is 24% on the federal level, and depending on the state, you may have to pay an additional percentage in state tax. If it’s a larger prize, you may be lifted into the highest tax bracket of 37%, requiring you to pay out even more of your earnings once it’s time to file taxes for the year in which you won.
So, Should I Take My Lottery Winnings as a Lump Sum?
There are different schools of thought on this, despite the reluctance of most lottery winners to take the annual payments. This depends in large part on your confidence to manage and invest a large windfall of cash.
For those who build toward retirement, one of the most important numbers to focus on is how much it takes to comfortably retire. The lottery can change how fast you earn that money in dramatic fashion, but that doesn’t mean it should automatically move the goalposts for you. Obviously, don’t go overboard with spending, and if you’re now thinking about investments, don’t just dive in to wherever your lottery-winning fantasies have taken you.
This is a good time to take a beat and invest with your head instead of your heart. It’s also a good time, if you can keep your winning on the quiet, to keep the news to yourself. Friends and family, though well-meaning, might be very curious to know what financial gifts might be coming. In addition to concerns about being fair and appropriate, you should know that financial gifts have tax implications—anything beyond $18,000 per person in 2024, for example, puts you beyond the annual exclusion amount per the IRS.
If you do want to involve a financial planner to help you, make sure that person has a Certified Financial Planner (CFP) designation, because that person is bound by the requirements of fiduciary duty, acting in the best interests of their clients.
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Actual Money Fights We’ve Had (and How We Solved Them)
What Do I Do with My Lottery Winnings?
If this is your first time visiting The White Coat Investor and you haven’t visited the Investing 101 page yet, that’s a good place to start.
The biggest takeaway to remember from that is don’t buy investments you don’t understand. If you don’t know what awaits you along your whole life insurance journey, for example, look at what you’re on the hook for before you sign up for it. Some investments might look good at first, but there could be surrender fees or tax implications that dull their shine once you crunch all the numbers on them.
Also, higher risk doesn’t necessarily mean higher reward. It’s best to diversify and think about what you’re willing to risk vs. what you’d like to keep in more stable investment vehicles. Investments that don't generate income are speculative and should make up a very limited part of your portfolio—if it’s there at all. That includes land, gold, and Bitcoin. All of that might be worth more one day than what you invested when you cash in the lottery ticket, but it also might not.
And here's a word to everybody who somehow doesn't win the lottery: if you invest well and especially if you invest early, you might not need to earn a record-setting lottery jackpot to retire comfortably. You could actually arrive at an eight-figure sum that doesn’t require you to land on six numbers that occur once in about 300 million tries.
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This is a the beauty of a written financial plan! If I won the lottery, I would just follow my plan. Pay off loans, save, invest in an 80/20 stock bond asset allocation and in cash flowing rental properties. I would also keep working. My goal for FI is not to stop working (I would get restless!) but to work on my terms.
Unfortunately many lottery winners likely don’t have this mindset. But we do!
Well written and thought-provoking article. Always titillating to think what one would do winning the lottery. And of course, those with a background in saving, frugality and FI learning, would be far ahead of the curve. And those not so, would enjoy their new-found riches like cocaine, but in a short time, have to deal with the withdrawal pain.
I’m not sure I understand how the lottery winner goes from 1.5 billion to 877 million and THEN had to pay taxes. What is that initially reduces the amount of money in this (and the following) example? I understand the high tax rate on a lump sum payout, but what is that first reduction from? Is that the “reduced rate” mentioned above? If so, what a gip!
Isn’t the initial reduction the result of taking the lump sum over the annuity? Then the tax bill is due.
Exactly.
Gypsies everywhere are writing in about how offended they are by your comment. 🙂
If we won the lottery, I don’t know if much would change for us on a personal/personal-spending level.
I think it’d change us in so far as it’d let us put our efforts somewhere within the realm of jump-starting a non-profit that focused on a particular cause. That organization would then require a lot of time and effort from us, which is where I think the change would occur.
We’re already FI, but of course, that money is for our ongoing “life support”.
To answer the question another way, despite being FI we still do our small amount of part-time work that focuses on fulfillment/satisfaction/mentoring–and we don’t need the money.
I would not stop working. I need to be doing something productive.
I would probably buy excess malpractice insurance to minimize the risk of losing everything from a big case. I don’t know how much or what it would cost.
I would gift a large sum to irrevocable trusts on behalf of my family. How much would depend on how much I got from the lottery. If possible, I would use up my lifetime exclusion amount now. That would get it out of my estate and let it grow. It would protect against future reductions in the exclusion.
I would probably park enough money to live the rest of our lives in something safe like a TIPS ladder and put the rest in stocks.
Other than that, it would be life as usual.
I’m trying to think.
I’m not sure what I would change if anything.
I either completely lack imagination or I’ve figured out how to live an optimal life for me already.
With minimal expenses, no debt, generous income, and low taxes I’m giving more to charity now.
I’m no saint. I just feel better when I help others than when I buy myself some new toy. That’s not true for everyone and that’s fine too.
We should be free to make our own life choices.
“You can’t be any geek off the street”
Gotta be good with the steel if you know what I mean
I’ve already won the lottery by being raised by a loving family complete with mother and father, received a phenomenal education, had mentors who cared and put their necks on the line for me, married the woman of my dreams, have two beautiful children and live in the beautiful US of A. That puts me in the elite upper echelon of lucky. I’ve worked hard and have never been scared to get my hands dirty. However, most people in the world will do backbreaking work day in and day out without receiving even a sliver of what I’ve been blessed with. Stop working if I win the lottery? Quit medicine? Maybe. Stop working entirely? Not a chance.
I don’t regularly play the lottery but when the megamillions gets into the 10 figure range I’ll go in with the nurses in my ICU and buy some tickets.
My “number” to stop working based on my current financial plan is 5 million (200k/year 4% etc).
I have 3 ranges of lottery winnings (based on cash in hand after taxes, etc) and I’ve probably given more thought to this than I should considering the odds of winning.
5-10 million or so. Keep working, buy nicer toys, take nicer trips. Consider doing just locums.
10-100 million. Consider stop working. get into into philanthropy (i.e. start a foundation vs. the usual donations we give now). Still buy nicer toys and nicer trips.
>100 million. same as 10-100 million but consider big time philanthropic moves (build a children’s hospital, etc)