Lottery--Lump sum or annuity?

Factual Questions
21

Sorry if I am repeating what someone else said but I like to put things simply…

When you win an annuity, say $100 million over 25 years, the state takes a lump sum and puts it into an annuity that will pay you the amount you won over 25 years. Since they have to pay it, I assume it’s pretty low risk, if not risk free, thus a low rate.

With the cash option, all they are doing is giving you teh amount they would put into an annuity for you to do what you want with it.

Example: $100 million. Annuity, you get 4 mill before taxes each year for 25 years, then you are done. And 4 mill a year from now

Cash optioin, you get $50 million, after taxes, say, it’s 35 million. Can you invest that 35 million in such a way to get you 4 million a year? Most likely you could at not much risk. maybe not each year, but over 25 years, it would average out. And, whatever interest you get beyond the 4 million a year can be put back into principal, so this would help increase the principal to combat inflation. So after 25 years, you get your 4 million like before, then guess what? You still have the 35 million in principal plus whatever interest you put back into it (amount beyond 4 mill a year). Or you could set it up so that you get 4 mill the first year, then 4 mill + expected inflation each year. It wouldn’t be hard to do.

Hasn’t the market averaged 12 percent over the long haul (10-15 year intervals)?

Imagine if you had won $1,000,000 23 years ago and were getting $40,000 a year. Would you rathe have gotten the 40K a year, or the ~$500,000 in 1978?

Every single advisor I’ve seen has suggested the cash option.

22

Thanks Oblong. I don’t know about anyone else, but that’s the best explanation I’ve heard of how it works to date.

23

[Joel Voice]Thank you Dr. Oblong[/Joel Voice]

Seriously, I understood what you said! I used to bitch about the difference between the two sums, and how idiotic I thought that people took the lump sum. But it makes sense. I know I can beat 3-4%. Can’t you just get CDs that pay that much? (Mr. Banker, I’d like to buy 2,000 CDs please).

24

“Cash optioin, you get $50 million, after taxes, say, it’s 35 million.”

Hey, what state would that be? I would sure like to win in that state. In California, you would come away with about $28M. Because of state taxes.

BTW, $4M in 25 years won’t be worth anything like $4M today.

25

This is an easy one folks.
The rate you believe you can get via bank deposit, cd, rampant speculation or whatever over the period of the annuity minus the rate at which the government discounts the lump sum. If the result is positive, take the lump sum. Negative, take the annuity. The government is going to urge you to take one or the other depending on whether they are bullish or bearish on interest rates. They urge you by giving you a discount rate on the annuity that is higher or lower than the rate on a gov. bond with a maturity at the end of said period.

26

Let’s not forget another issue, which is that if you opt for the annuity you have some choices taken away from you. This is either good or bad depending on how good you are at making choices. (-:

What if, five years from now you decide that life as a millionaire is boring, and you want to invest your money in a new business? Or spend 20 million to shoot yourself into space? The annuity option won’t let you do that without borrowing against the annuity.

On the other hand, perhaps that’s just what you need to protect you from yourself. My Aunt and Uncle won a lottery of over 1 million dollars, and managed to blow all the money in a couple of years. I vividly remember being taken for a ride in my Uncle’s brand-new Cadillac, in which we ended up in a field with him yelling “Yee Haw!” while burning circles. The car was a piece of junk within months. They ran out and bought a $150,000 boat and wrecked it throwing wild parties and never maintaining it. An annuity would have saved them from themselves, at least to some degree.

27

Shouldn’t be much of a problem, Sam Stone. You can always sell the rights to the annuity (well, theoretically–in some states it’s illegal). What do you get for it? The net present value, of course.

28

I would take the lump sum, in a heartbeat. Never leave the state in control of your money when you could be managing it yourself, or paying someone brilliant to do it for you.

Even if a $100 million jackpot gets you $60M in a lump sum, and after taxes you end up with about $30M (I’m in CA), you’re still ahead.

Even in an average interest-earning account, that $30M (or whatever you put in) should double approximately every six years if you let the interest accrue. No state annuity will get you that. Also, investing the smaller amounts will not give you the leverage or return that the lump sum will.

Remember David Baldacci’s book The Winner? The way a reporter finally figured out that the lottery had been rigged was by looking at the winners. Most blew it all and ended up worse off than before, while nine winners in a row did incredibly well and beat all expectations, leading him to believe that something wasn’t right. Most lottery winners squander their cash and end in real tax trouble because they just weren’t equipped to deal with the windfall.

I still believe that lotteries are a poor tax, but that doesn’t stop me from buying the stupid ticket when the jackpot goes over $20 million. I’m such a dumbass.

29

This corresponds with an annual rate of about 12.2%. Where do you do your banking?

30

Johnson: You’re not going to get net present value if you sell your annuity. You’ll get net present value - whatever profit the purchaser expects to make for doing the transaction, or else they’d have no incentive to do so.

31

That’s true, Sam Stone, as it is with all economic transactions…

32

From the California Lottery website;
http://www.calottery.com/media/winnersqanda.asp

Not quite as bad as half.
So a $60MM lump sum would get you about $42MM.
Does anybody know how a tax attorney charges for services with a sum this large?
EJsGirl, do I get 1/2 of that $12MM windfall I found for you? :wink:
Peace,
mangeorge

33

Originally posted by EJ’sGirl: <<<<Even in an average interest-earning account, that $30M (or whatever you put in) should double approximately every six years if you let the interest accrue. >>>

I think we’ve gone too long between bear markets. If this is an indicator of investor sentiment, go short. <g>

More realistic: at this writing, 1 year CDs are averaging 3.95% according to http://www.bankrate.com. That equates to a double every 18.2 years. The difference is astounding.

Long term rate of return on equities: roughly 10%. So you’re looking at a double at BEST every 7 years. But many sharp cookies (John C. Bogle, among them) think that equities will likely return 6-8% over the next decade or so, since that 10% takes into account an expansion of PE’s that’s unlikely to continue. So expect something along the lines of an increase parallel to company earnings expansion + dividends.

By the way, one of the most useful concepts I ever learned is the “rule of 72’s.” Learn it. Love it. Live it! :slight_smile:

http://www.cratercomets.com/csb/agenda/2000-2001/3rdNine/week8/Financial%20Goals.htm

34

That’s true, but you’ll probably fall in the 50% tax bracket (unless you’ve got some MAJOR deductions / fraud) so you’d owe another $12M (question- what do you use the double Ms for?) that you’d be expected to pay by April 15th.

35

M = 1,000
MM = 1,000,000
No?
K = 1,000?
Marilyn Monroe hangup?
Mighty Mouse hangup?
I’m french?
I thought the max tax was 30 something (37?) per-cent.
Peace,
mangeorge

36

Wonder where bugg lives. In the United States, the maximum federal income tax bracket was 39.6% (starting at around $250,000 for single filers, I believe). It will be dropping over the next 8 years or so to 35%. Not all states exempt lottery winnings from the income tax, so choose your residence wisely…

37

Another thing to consider is that if you take the annuity, you are receiving payments over time from a single source.

What if the Powerball consortium goes bankrupt? What if their chief investor runs off to Europe with his 25 year old secretary and $100 million of your money?

Now, I wouldn’t be surprised if the money is carefully segregated and controlled to prevent such things from happening, but still -

If you take an annuity in U.S. dollars, you are taking a small (but real) currency risk. Granted, the chances of hyperinflation in the US are low, but still, with that much money at stake, why not take the lump sum and invest chunks of it in Swiss-franc denominated bank accounts, real estate, etc.?

38

Absolutely, positively, TAKE THE MONEY AND RUN.

Who knows what will happen in 5 or 10 years where some slimebag politicians will decide they cant afford to pay off lottery winners, probably for some lameass reason like feeding starving children, or medicine for old people.

Buy some big cannons, prepare the fortress, then convert the rest to cash, roll around naked in the money, try not to end up dead like most of the winners.

39

Would be to give the money to me :stuck_out_tongue:

I had read somewhere that if you steal money in England, but give it to someone else, you are no longer guilty of theft.
Perhap reside in England and pass the money off to a friend and when the authorities come after you, you switch again.

40

Or ALL of the losers.