Would you rather be a millionaire or have a secure and reliable passive income for life? That is the difficult choice that many lucky lottery winners often face. While the prospect of a seven-figure payout is tempting, 20-year-old Brenda Aubin-Vega from 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 stunned to discover she had just collected the game’s top prize. “I couldn’t believe my eyes! I checked my ticket again,” she told Yahoo News Canada (1).
After calling her father and taking time off work, Aubin-Vega reached out to Loto-Québec to let them know she would be claiming her prize in the form of a $1,000 weekly annuity instead of the $1 million lump sum that was also available.
The decision sparked ridicule on social media, with Reddit commenters insisting the upfront payment was the rational move. The reaction highlights a wider debate about whether large windfalls are superior to guaranteed income.
Here are some of the pros and cons of Aubin-Vega’s annuity approach.
Taxes are, perhaps, the most important factor to consider if you’re ever faced with a choice between a windfall or a hefty annuity. Gambling income is fully taxable, according to the Internal Revenue Service (IRS) (2). Many American winners also face state and local taxes on their lottery winnings.
The person who won the $1.5 billion Powerball jackpot on December 17th would only take home $516.7 million after federal taxes and maybe even less depending on their home state (3).
Fortunately for Aubin-Vega, she is Canadian and faces no taxes on her lottery winnings (4). In other words, she could have claimed $1 million without any taxes or penalties. However, she will then be faced with a difficult decision about the investment of that lump sum.
By taking the $1,000 weekly payments, Aubin-Vega effectively locked in a 5.2% annual yield on her jackpot. Since the payments are provided by the Canadian province of Quebec, this annual yield is almost as safe as the yield on a government treasury bond. Canada’s 10-year bond currently offers a yield of 3.4%, which makes Aubin-Vega’s move seem more financially savvy (5).
Simply put, by taking the weekly payments, she secured an asset that is safer than the stock market and more profitable than the bond market.
Aubin-Vega’s age is another factor that makes the weekly payouts more attractive. By collecting $1,000 a week, she will reach the goal of $1 million at age 39 and eventually hit $3.1 million in total pay by age 80. If you invest the weekly payments instead of spending, she can hit the two important stages years earlier.
Finally, taking a modest weekly payout instead of an eye-catching million-dollar jackpot could make Aubin-Vega less vulnerable to bad actors. As a Redditor said: “The advantage of not getting the lump sum is that the vultures don’t start circling for a payout. It’s the only way you can win a million and tell people.”
However, there are some downsides to turning down a million dollars.
Read More: Vanguard reveals what could be coming for US stocks, raising alarm bells for retirees. Here’s why and how to protect yourself
One of the downsides of collecting a weekly payment instead of an upfront jackpot is the lack of flexibility. An annuity is permanent, but $1 million in cash can be freely invested in a wide range of asset classes, some of which may have given better growth opportunities.
For example, investing $1 million in a low-cost index fund and assuming a 7% annual growth rate could have turned Aubin-Vega into a multimillionaire in about 10 years. At that point, an annual withdrawal of 4% gives more cash flow.
Inflation is another downside risk for it. The purchasing power of her weekly payments gradually erodes over time. Assuming annual inflation of 2%, a $1,000 weekly payment could be worth less than half of today’s value 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 just isn’t as impressive as being a millionaire in your 20s. For some lucky lottery winners, that’s reason enough to get a cash advance.
We rely only on verified sources and credible reporting from third parties. 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.
