Mega Millions jackpot winners have the option of taking their money in one lump sum or spreading it out over many years. Which is better? This is quite a complicated question. People have differing opinions on the matter. The consensus is to take the option that leaves one with the most money. There are several factors to consider, however.
There is a large camp of proponents of the lump sum. The argument goes that it is easier to invest the money oneself, and thus get more money in the long run. This is not so simple. At the time of disbursement, taxes and fees get taken out. Taxes are calculated on the amount of gross winnings disbursed. This means that someone with a huge lump sum will be in a higher tax bracket than someone who is taking 1/400th of the jackpot amount as an annuity.
Another big surprise that lump sum proponents often face is the fact that the lump sum is not the advertised jackpot amount before taxes. The advertised amount is for the annuity and takes inflation and interest accruing into account. Over the years of the annuity, the disbursements increase by an average of 4% a year to account for inflation. Purchasing power remains the same, though. Also, the money is accruing compound interest. The interest rate is fixed, so the final amount is calculated and advertised as the jackpot.
When one takes the lump sum, the inflation and interest accruing hasn’t had a chance to happen, so the amount paid is significantly smaller than what was advertised. If one chooses to take the cash option and then invest it in a similar interest bearing account, it can be expected that the value will be equal to the advertised jackpot amount.