Let’s say I buy a ticket for the Mega Millions Lottery here in New York when the jackpot is $100 million (just to keep the math easier). I choose the lump-sum option, rather than the pay-over-25-years option.
Now, I know that when a lottery is won in New York, the director of the lottery (or some underling) goes and calls a company to find out the cost of buying an annuity for the life of the payout and the cost of the annuity is the actual lump-sum amount. I also know that this figure can and will change as interest rates change. So, for argument’s sake, I’ll take a reasonable guess.
After that, there are lottery taxes and, in addition, I’ll probably end up owing federal, state and local taxes too on the winnings.
Given all these factors, when (not if, when ) I win $100 million dollars, approximately how much will I be able to actually walk away with?
Interest rates changes and differing tax rates from location to location make it hard to say, but where I live you are likely to walk away with about one third of the advertised jackpot assuming you don’t have to share it.
Lance gave you the close estimate: 1/3 of the advertised win is the usual cash pay-out after taxes. So your $100 million jackpot will put approximately $35 million into your bank account, after taxes.
The Mega Millions jackpot was recently $390 million. A couple from New Jersey had one of the two winning tickets, and a news article said that they would get $117 million, minus 25% for federal withholding. I think the other winner (from a different state, with different options for how to cash out) netted $80 million, I think after the federal withholding.
The lesson is that the taxes eat up a good chunk, but so does the fact that the advertised amount is the annuity value.
I came up with a formula a couple of years ago, and it’s what I use for my Weekly Lottery Fantasy, in which I break down what I’m going to do with the money.
I don’t remember exactly how I arrived at it, but it assumed that you get half the advertised jackpot, less 41% for the max fed, state and SS tax rates (I live in Virginia; YMMV). So, what I do is multiply the advertised amount by .295.
Keep in mind that the amount they withhold isn’t the max rate and you’ll still end up owing more. I think they withhold about 32% overall.
So, using that formula, tonight’s $48M jackpot would work out to $14.16M net.
So, my Weekly Lottery Fantasy this week looks like I’ll invest $11 conservatively and diversely, then get all the sweet swag I want with the rest.
A related question is it worth taking the lump sum or the annual amount over 25-30 years? Your local tax issues, your age and health, your personal desires to be rich(!), among others should be taken into account. There is no single answer for everyone and the ultimate decision one makes may be different by changing different parts of the equation.
Here’s a CNN/Money story about a guy who won a 2005 Powerball jackpot worth $220 million. He took the lump sum ($85 million) and then gathered financial advisors to help him achieve his goal of becoming a billionaire from his lump sum, within ten years!
As an academic exercise, all power to him. But when it comes down to it, no matter how rich you are, and the cars, houses and vacation trips to boot, how much is your quality of life improved when you can wear only one pair of pants at a time?
I’ve never done the math on this myself, but the argument I always hear against being paid annually is that, taking inflation into account, your payment 20 years from now simply won’t be worth as much.
Of course, if you’re really bad at managing money, this may still be the better option for you. Particularly since, if your $5 million annual payment in the year 2027 is “only” worth $1 million in today’s money (just an example), it turns out that’s still a lot of cash.
I don’t remember how I did it, but I think you might be right on that part. In terms of the fed and state tax, though, I’m fairly certain that 25%-32% they withhold is insufficient for multi-millions of income. I think they withhold a minimal amount so as to make it look like winners get more money than they really do, just like they do with the advertised amount.
You can do things with large amounts of money besides just consumerism. You can start companies, endow universities, form foundations, bankroll movies, influence elections. Haven’t you ever heard Shaquille O’Neal talking about the difference between him, who makes $30 million a year, and the team owners, who can afford to pay him and ten others $30 million a year? There is an enormous qualitative difference, not just quantitative difference, between having money and being wealthy.
Besides, you can get a really good pair of pants if you’ve got the money. It does made a difference. Really.
Based on the example above of the $390 million case and assuming a tax of 33% it looks like the discount rate was about 2.5%. In that case you would get $36 million.
My point was really aimed at those who, IMHO, think it’s so important to have gold-plated water taps in the bathroom, a dozen cars, and three houses, yet don’t have enough money left over to enjoy it. Hence, my comment you can only wear one pair of pants at a time.
I wonder if someone has bothered to look up as many lottery winners as possible and do a study of their socioeconomic status before they won, and what changed after they won. IIRC, some psychologists say that your core beliefs and attitudes towards money in particular, and life, in general, really are the guides as to how you fair with an overnight lottery win. So if you were lousy at money management before you won, your chances at squandering the payoff are higher than if had your head straight before you won.
FWIW: California is a MegaMillions state and according to their site, no California state tax is charged for MegaMillions winners. If you win the California sponsored “Super Lotto” then you are charged state tax on those winnings.
Well my chances of scoring a date with Jessica Alba increase exponentially with my ability to afford to run in the circles celebs do. Sounds like a pretty nice bump in quality of life.
If this is correct it’s a change from the way the California Lottery was first set up. No state income tax was charged on lottery winnings. The way I read the MegMillions site is that California still has no state tax on any lottery winnings.
To paraphrase Pratchett, he describes someone as dreaming the Dream that all those in publishing dream, to have so much gold in his pockets that he would have to employ two people just to hold up his trousers.
It seems patently obvious to me that if you were really good at managing money, or knew anything at all about math, you wouldn’t have played the lottery in the first place. Hence the stories of the winners who take the lump sum and within five years are broke, with no friends or family left. E.g., the tragic story of Jack Whittaker.
) I win $100 million dollars, approximately how much will I be able to actually walk away with?