Assuming that this isn’t a “whoosh” I’ll take a poke at it - if (and as discussed that’s a big if) you can handle that kind of money sensibly it makes a lot of sense.
Let’s look at the CA lotto, suppose there’s a $100M jackpot. You can take it spread out over 25 years (say $4M per year, although I think it’s spread out unevenly - bigger payments in later years) or you can take a lump sum payout of about $50M.
Quick back of the envelope calculation (rule of 72) says that if I invest that $50M at about 3.5%, in 25 years I’ll have $100M. And as noted, government bonds (pretty solid) are just over 4.5% today - at that rate, I’d have $100M in just 16 years. You’re living like a slightly lesser king for a bit (but still filthy rich) in order to reap a windfall a little down the road.
And that’s with some pretty tight earnings, you can certainly do much, much better.
Even the state lottery admits that you can do much better than them at investing the money - they are required to keep the principal in very conservative investments.
The trick is in not blowing it all on Lamborghinis and platinum bidets right off the bat. I’d get a good financial advisor and keep my head screwed on straight.
“Rich” athletes are nothing more than lottery winners, too. Only the top 5% might have enough wealth to stay rich, or well off, for life.
Take a dope like Terrel Owens. He’ll earn 25 mill over his career, 98% of that is NFL contract salary. He owns a 4.9 mill dollar home, with taxes around $40,000/year in NJ, and a similar or bigger home in Atlanta.
10 mill in property, and 100k in taxes…and all the other clothing, car, travel and home expenses keep coming, and coming, and coming.
If I’d won 25 million, I don’t think 10 mill would go towards two properties. Essentially, 25 mill is really worth 15 after taxes anyway.
Not to sidetrack the discussion but consider that in the NFL the contracts are not guaranteed beyond the current year. Get hurt or become less effective and they can cut you loose. That is not necessarily true of the NBA, MLB or NHL. That is why NFL athletes (or more correctly, their agents) love signing bonuses.
And the worst part is that if you’re one of the rare exceptions who wins a big lottery prize and then is able to successfully invest your winnings and increase your money, you just end up crashing on a mysterious island trying to figure out what the crazy French woman is talking about and whether you should keep pushing the button.
That’s not true. $60 today invested at the discount rate used in figuring the lump sum payment would equal exactly $5 a year for 20 years.
It is true, however, that $60 today might be more useful, today and in the near future, than an assured income over 20 years.
The key is,** “DISCIPLINE.” ** If you have it you will do well in either case.
Living where there are casinos on every corner I’ve walked past the Megabucks machines going to breakfast about a zillion times. As a retired accountant I felt the need to look into this and worked out a very detailed spreadsheet (since lost in the great computer crash of 'ought five). The prize of the time was about $40 million over 25 years or the pay out.
I found that living on half and investing half (or something like that I forget the specifics now) gave you a better after tax position from year one through year forever.
My ex-wife’s grandmother lives next to a lottery winner. The guy had some land. The lot was big because it’s in rural Ohio (it was farmland). Grandma has a dumpy old house with a small pasture for her cows. The lottery winner put up a mansion next door. That place will never sell. Most of the other homes are farms or trailers. Across the street there is a lot where the owners have lived in a trailer until it was junk, and then just bought a new one, leaving the old one in place. Three times. Around the block people are living in abandoned school buses.
I know if I won a huge jackpot (say, $25 million after taxes), I would have a small spending spree, then invest the rest and live off the interest. I’d buy a nice house (not anything massive, but a nice, well made home in a good neighborhood, probably about 3000 sq feet…big, room to expand with a family, but not insane). I’d buy a solid sedan (Toyota Camry or Avalon or something), a truck, and my dream car: a 911 Turbo (my only REAL luxury). I’d also buy enough photography equipment to last me my life. After furnishing the house, etc, I figure I’ll have spent around $2-$3 million tops. The other $22 million goes into an investment, and I live off the interest, without having to worry about car or house payments.
For what it’s worth, the prizes in Massachusetts periodically become “wins,” and I used to buy tickets only then (and at Christmastime). Although I did figure out at one point that in order to have a 50% chance of coming out ahead, I would have to buy $2000 worth of tickets. But I also had/have enough disposable income to drop a bit on lottery tickets.
I also think that lottery tickets make great stocking stuffers. Kids have fun scratching them, and it fits well into the whole “what’s in the box?” fun of Christmas.
My point in post #38, which I guess didn’t make clearly enough, was not that it’s a bad deal to take the lump sum from a theoretical point of view. I understand how annuities work, and that a well-managed investment portfolio would outperform the lottery’s annuity. The point is, how likely is it that anyone who isn’t already a millionaire would actually put all of the lump sum into such a fund, rather than blow a large portion of it on houses, cars, and lap dances? According to the stories related here so far, not very.
I might have thought that some winners would have the smarts to say, Well, I’ve been getting by on $20,000 or $30,000 a year so far. I should be able to manage on $5 million a year. Not getting the whole amount at once will keep me from doing something really stupid. And maybe keep my asshole friends and relatives from being quite so greedy, too.
No one seems to think this way. Everyone tells them they could do better by taking the lump sum and investing it, then they blow it all.
(Okay, that’s what happens in the stories that make the Washington Post Magazine. There are probably lots of people who take the annual payments or the lump sum and don’t crash and burn. We just don’t hear about them.)
The main difference, I would argue, is that athletes have worked for their money. Winning $10 million in the lottery is different from winning a $10 million pro football contract, because a football player has sunk many years of work for that money. While they may be overpaid (depending on personal opinion), they are at least being compensated for something.
This is exactly why I buy lotto tickets, even against all the odds. I get more pleasure out of planning what I will do if I win than I would spending the same money on a latté at Dunkin’ Donuts.
To answer the OP: NPR did a report on this topic after Jack Whittaker won that huge jackpot in 2002. Their figure was that 35 percent of lottery winners are bankrupt within five years.
