Here’s one of the first things I would buy. I know it’s a prototype, but I assume if I have the $250,000 (or if I sweeten it to a half mil), money talks.
If I could win $300 million and wind up broke, I’d wear that as a badge of honor.
Reminds me of that movie where Richard Pryor has to piss away $30000000 in 30 days, and he is not allowed to give it away, gamble it, or destroy it, or accumulate any assets.
Seems to me that the lump sum is a sucker option designed to save the lottery commission money by bewildering people with the promise of all that money at once. $753 million paid out over 30 years is a better deal than $300 million paid out at once, and after taxes it still equals out to around $17 million a year, which is more money than most of us could spend in one year if we tried.
And it’s not as if the money goes away if you die young - the annuity is transferrable to your heirs.
Yes, the annuity is transferable to your heirs, but they will owe taxes immediately on whatever the total is to be paid out in the future. So you need to have made arrangements for this event; perhaps getting life insurance to help with the sudden expense.
…Wouldn’t they just owe taxes on whatever installment they received in a given tax year?
Our investment accounts already have a cash account. So
[ul][li]I win $300M in the lottery (I don’t play the lottery, but if I did)[/li][li]I tell no one except my wife.[/li][li]Sign the ticket on the back.[/li][li]The next morning finds us, bright and early, at the lottery office with our noses pressed against the glass and two forms of identification.[/li][li]Do the paperwork to get the dough. (I don’t suppose they would let me give my name as No YouCantHaveAny). [/li][li]Call my financial guy and tell him to expect a large influx.[/li][li]Have them mail a check or do an EFT to my cash account.[/li][li]Set up a meeting with my financial guy on how to invest.[/li][li]Profit![/ul][/li]
Regards,
Shodan
Annuities used to be the only option.
That’s not my understanding, and of course I could be wrong. So that’s why professional advice is needed.
All in all a sound plan. Far better than many. Though I might quibble about not setting up an offshore trust first to own the ticket and then to collect the winnings.
Ref the snip, unless you’re a lot wealthier than you let on here, the particular guy you use today is probably incompetent to handle that much money. Depending on who he works for they may have a department appropriate to that much money. For sure he can help you avoid avoid gross errors in the first couple months.
As with all this stuff, it really depends on how much somebody wants to maximize their returns on this lump vs. how much they’re content to do something sub-optimal but simpler or safer.
At my age and with no kids and no deep seated need to fund a charity I could imagine dumping the whole lot into Treasuries and spending that, plus up to 1% of principal per year.
That’d still leave me with a hefty dollop of cash in my dotage to pay for that new-fangled and very, very expensive multi-millionaires only need apply life extension tech that may be out there by then.
Absent that life extension concern, I could spend a much larger fraction of principle in addition to the earnings.
That’s what I *could *do. But what would I do?
I think in practice my approach to life, possessions, activities, etc. could easily scale to spending $2M/year, but more heavily the first couple years during the accumulation of toys phase. It’d be hard pressed to grow to $10M. Though I suppose I could learn.
But if you could get about an investment return of about five or six percent, you’d still get that $17 million each year, without touching the principal amount. And the S&P 500 historically has returned about ten percent, so it seems doable.
I might follow the example of the big university endowments and only withdraw two percent each year (along with another two percent for charities).
And actually the best part of having that kind of money would be trying to figure out who to give it away to and for what.
When comparing the annuity to the cash option, the pertinent question is, could you take the annuity and then sell the cash flows for more than $300MM in the open market?
Is it a fixed 30 years, rather than lifetime? If so, I make the IRR 8.2% for cash $300 vs $753 spread evenly over 30 years.
The valuation will depend heavily on tax assumptions and the credit spread (bond yield over Treasuries) for the paying entity, but 8% is a very high number. At face value you could take the annuity and sell the cash flows in the open market for far more than $300MM. I think the missing element is the tax situation.
No, assuming the present value of the remaining payments is more than the estate tax exemption which here it would be (that’s only $5 some mil), they would owe 40% of that present value immediately in estate tax. That’s a major wrinkle to the annuity option if your life expectancy isn’t greater than 30 yrs. There are ways to deal with that but it’s not a ‘no brainer’ to take the annuity for people at least in their 40’s say for that reason.
Otherwise the annuity generally represents an after tax return of something like 3-4% v the lump sum. As always comes up on any thread touching on return, many average people think it’s like falling off a log to far exceed with wise investing…but they may be too much conditioned by past risky rates of return in hindsight. They are probably not thinking about just how low long term riskless rates are now, 2.35% on Vanguard long term municipal bond fund (not federally taxable, mostly taxable in any given state). Comparing to the US 30 yr treasury (2.75% before federal tax, not state taxable) isn’t apples and apples because a lottery pay out entity is not entitled to create $'s to pay off its debt like the federal govt.
But if you factor in secondary tax considerations like estate, or just have high confidence in earning a good return (and really think that’s necessary with so much money) or want to supervise giving the money away to charity while you’re around, then annuity isn’t the obvious choice. But neither is lump sum, depending.
As others have noted, not necessarily. Corry El’s guesstimate was pretty accurate, according to this calculator, which finds $753M to be what $300M grows to in thirty years with just under 3.1% interest. And if we ever get 1970s style inflation again, the annuity will start looking like a real sucker move: in the last decade it could start looking like merely “well off money” rather than “FU money”.
It’s certainly not more than I could spend in a year, and it very much limits your options. There are lots of possibilities in terms of buying all or part of a company that might interest you now or five years from now. But even if that’s just not your style, one of the smartest and most enjoyable things you could do with the money is buy ultra-high-end real estate around the world. Get a villa near Clooney’s on Lake Como, an NYC penthouse overlooking Central Park, another in Shanghai, a pied-a-terre in Paris, and so on. You could spend the bulk of that $300M pretty easily, but you now have real estate investments that are virtually guaranteed to appreciate significantly (or hold their value at the very least), which you can also use to travel the world without having to check in and out of hotels. I actually think, as I noted in this thread, that when automation makes virtually all goods and services dirt cheap, one of the only investments that will still be scarce enough to mark someone as “rich” is real estate in a prime location.
Love this!
That’s not the correct way to value the annuity. The $753MM is not received after 30 years, 1/30 of it is received each year for 30 years. As I said above, if you value the cash flows ignoring taxes, the IRR is 8.2%.
But, as we’ve noted, the tax situation is complex.
Except that you have to pay taxes, utilities and upkeep on that high-end real estate, as well as furnishing all of it. If there’s a downturn in the economy (as in 2008), you could end up cash poor with a bunch of properties worth less than they originally cost you.
There are billionaires who own multiple houses around the world, with each costing in the $10-50 million range, and only staying in each for maybe a couple of weeks each year. I never understood that; wouldn’t it be cheaper and easier just to stay in really high-end hotels when traveling? Or just rent someone else’s mega-mansion.
If the downturn is steep as in 2008 and happens immediately after you buy the properties, your balance sheet could certainly suffer. But that’s awfully bad luck, and you would not be able to lose your shirt (carefully chosen high-end properties will always have value).
As for staying in high-end hotels, you’re guaranteed to lose money that way (whereas if you don’t have that 2008 bad luck, the properties you buy will likely appreciate more than the utilities and taxes cost you). And you don’t get to decorate them as you choose, or leave your belongings in them. No matter how well they’re cleaned, you’re still inhabiting a space many others have occupied in the recent past. Which reminds me: a nice yacht could be another option for world travel.
As you may have noticed, all the gains in the last 20 years have flowed to the 0.1%. IOW, those are the people who have the excess money to bid up the price of goods.
If you have $10M to spend on a real estate investment you can either spend it buying 100 $100K houses appreciating at ~3% a year. Or you can buy one $10M palace appreciating at 10+% a year.
Tough call.
I read a book called “Richistan”. Basically, saying “…the rich are different from you and me…” There are categories of rich. Once people get into the $50M to $100M range they can afford a staff to take care of their properties and expedite things - such as making sure a jet is waiting, and the car at each end, that the fridge is stocked when you get to Como or Manhattan, laundry service happens, etc. Plus, the accounting services to make sure this all gets reported properly to the IRS.
The number one thing BIG money buys is immunity from the trivia of every day life. $300M - let’s say you’re old, you only have 60 years left to live. That’s $5M a year (not that you likely need $5M when you’re 90). Plus, let’s say, $3M interest the first little while, so $8M. If a staff of 10 to heed your every beck and call costs you $1M you still have $7M to blow each year. Heck, you could hire a barista away from Starbucks just to make coffee whenever you felt like it, and I’m sure he’d (she’d) be happy with $60,000 a year.
Also remember - the USA is the only country - except Eritrea - where even if you skip the country and live your life elsewhere, you still owe taxes to the IRS every year. At least, unlike Eritrea, so far they don’t physically threaten your relatives if you fail to pay up. So you decide to renounce your citizenship? Then, you can only visit the USA for 30 days a year, IIRC.
I’ll agree with the post that said - if your entire amount is in bonds or interest-bearing savings, the taxes are NOT complicated. Besides, you will pay the accountants (yours or the banks’) a trivial portion to ensure the taxes are paid correctly.
True on having to calculate it based on the payments over time not one at the end. But 330-some mixes apples and oranges because that’s the media’s estimate of after tax lump sum, but 758.7mil is the pretax sum of the annuity payments. The pre tax lump sum is 480.5 mil. Also the annuity payments aren’t level but increase 5% a year. That’s advertised as ‘covering the increase in the cost of living’ but the actual reason is to shift more of the total payout further out where it’s worth less in present value than the same sum would be as level payments, or IOW the increasing schedule gives a lower IRR than level payments with the same total of 758.7 would.
Assuming the first annuity payment is at time 0 then yrs 1-29 increasing 5% a year, the first one is 11.4mil. The discount rate of that stream of increasing payments to get a present value of 480.5 mil, IOW the IRR, is 2.71%. I checked that on a NJ powerball payout a little while ago where I found the exact schedule (see link and click ‘analysis’ to see the lump sum) and the IRR was almost the same. That’s apparently the going rate lately. 3-4% I saw in some article. Obviously it closely follows market long term interest rates which were somewhat higher earlier this year, and obviously much higher years ago.
https://www.usamega.com/powerball-jackpot-annuity.asp?state=NJ&d