If it was possible to get a higher rate of return withoutsignificant risk, why wouldn't the lottery be getting that higher rateand offering an even bigger annuity?
Of course it depends on whatyou mean by sigificant risk. The lottery is guaranteeing to pay theannuity, so they take a modest interest rate in exchange for very lowrisk. You can do the same by investing the lump sum in a savingsaccount, CD, government secuities, or any number of investmentsthat offfer a defined return on your investment. If you'rewilling to accept a little more risk you'll probably get a betterreturn. If you're willing to accept even more risk there's a decentchance you can get a really good return. Enron and Worldcom are fairlyrecent and notorius examples of what happens when the risk wins outover the reward.
The annuity value doesn't exist yet, so you don't really lose50% or so by taking the cash. Unless you're a complete moron (or youactually want to blow through it in a hurry), you're going to investthe money one way or another, so its just a matter of how you investit. That means the real choice is to take the cash or let the lotteryinvest it for you (and eventually pay the full annuity value). If youlet the lottery invest it, you won't lose a big chunk to taxes rightoff the bat, so the full value (less the first annuity payment) will beinvested. If you take the cash you'll be losing about 35% to theIRS, and as much as 9% to the state treasury. That means you'llonly be able to invest 56 to 65% of the cash value, less whatever youkeep liquid so that you can spend it (the equivalent of that firstannuity payment). If you only get to invest 60 cents for every dollarthe lottery gets to invest your investment will need an interest ratethat's 1.67 times what the lottery is getting in order to earn the sameamount of money. In some investments you'll need to pay taxes on thatyear's earnings, but the money the lottery invests will all earninterest until it is paid to you. As a bonus, some of each annuitypayment will be taxed at lower rates. That could save you about 30grand each year, as compared to paying the taxes all at once. For a 25year annuity that's a potential savings of about $750,000. For ajackpot that would pay $3 million now or $20k per year for the next 25years that's pretty significant.
AFAIC, the real reason to take the cash is for the flexibility.