Fairly straightforward. I was reading this thread, when I came upon this post, which links to an interesting article about how putting the savings (or in this case, windfall profits) into indexed mutual funds is in the long term a smarter strategy than letting a broker try to parlay it into huge profits.
So I’m down with that. I’m planning on winning the Mega Millions this Tuesday evening, which, if my calculations are reliable, should net me about $65M after taxes.* I’ve got some general plans for distributing a large chunk of that, but they include leaving me with $23M to invest, and I’m gonna go with indexed mutual funds, like the article said.
So here’s the question: Let’s say the portfolio earns me 2% the first year. That comes to $460K. Estimate a 40% tax bite, leaving me with $276K (which ought to get me through, so long as I don’t quit my day job). How do I turn those earnings into spendable paper money?
*Also, can anyone point me to a utility that calculates the lump-sum cash value of the jackpot, given the face value (for the multi-state Mega Millions game that California participates in)?
When the index fund pays dividend and interest, you have the option of reinvesting it or taking it in cash. In your example, you’d choose the cash option.
Depending upon the type of account you have the index fund in, the cash will either be deposited in your account (and you can withdraw it from there) or the fund may send you a check.
You don’t buy and sell the mutual fund yourself. That’s what a legitimate brokerage firm does for you. You tell your broker to send you the interest. That’s all it takes. The firm can send out checks or create its own checking account or any arrangement you are interested in. For an account that big they’ll let you stop by once a month and shower you with dollar bills.
I thought of something else. Why take the lump sum? According to your estimate, you’ll only come out with $65 million after taxes. If you take the annuity option, you’ll get 26 annual payments of $7,538,461.54. Assuming 40% tax on this, you’ll clear $4,523,076.92 each year for the next 26 years. That’s $117,600,000 total after taxes.
This way, you won’t have to worry about investing anything and will have MUCH more per year than your estimate of $276,000 per year.
These figures of course don’t account for inflation, tax law changes, or your life expectancy. But it’s something to think about.
First, dividends and interest will not be taxed at your full income tax rate, thanks to the Bush Tax Cuts (you may have noticed them talking about this in the news pretty much non-stop for the last 2 years). IIRC the rate is 10% and 15% for “qualified” investments.
Second, you simply tell your broker you want the distribution in cash, and they direct deposit it to your bank account. I do this with my stock dividends and tax-free municipal bonds, but roll my mutual funds over.
(FTR, if you’re only assuming a 2% ROR, you’d be better off putting them into State and Federal tax-free municipal bonds. I can still find insured ones for 3-4%.)
Well, I’m 54 years old. I’d be eighty by the time payment #26 came in, presuming I’d live that long. I really don’t think I’d be able (or inclined) to spend $276K every year. And it would be nice, no matter how long I live, to be able to leave the lion’s share of the principal to my daughter.
Also, I’m planning to give about 10% to my church. My church does this “give back to the community” thing where every month, they choose a local non-profit that could use some help, and cut them a check for ten percent of the church’s collection plate for the month. I’d be kind of tickled to watch them pass out a check for $700k to the local chapter of the locked-in Syndrome support group.
Ah, thanks for the more realistic numbers, Una. I don’t watch the news, and I’ve never had any money to invest, so I never paid much attention to tax rates on invested money.
I think I’d be inclined to insist on paying the IRS and the Franchise Tax Board a combined 40%, just as a pinko-liberal “fuck you” to Shrubya for his irresponsibility.
Actually, your age is perfect. The money will last just about your lifespan, so you’ll have no worries about managing investments, etc. You can just live your life knowing each year you’ll clear $4,000,000+ each year.
If you die before you receive all the payments, the remaining payments are made to your estate. So your daughter will get your remaining $4,000,000+ checks each year (assuming she is your heir).
You can still donate 10% / year to your church. It will be about $400,000 (after tax) or $700,000 (if you use 10% pre-tax).
The OP is meaningless, as I have already purchased my ticket.
$4 million a year when I’m in my late 70s is meaningless. I’m 2 years older than the OP, and I want the money now, while I’m young enough to do shit with it. Travel is no activity for the elderly. I’m going to blow the bunch before I’m too old to enjoy it.
One problem is that as I understand this, if you die before receiving all of the annuity payments, your estate owes taxes on the money still to be received. So you’ll want to make sure that you’ve made arrangements to cover the tax bill, perhaps through a life insurance plan.
Vanguard will mail you a check, or drop money in your bank account. You can also choose to have them automatically reinvest the money, where you’ll get shares at a discounted rate for some of their mutual funds. You can then click some options to manually tell them exactly how much you want to take out of the fund (and subsequently mailed to you in a check, or dumped in your bank account), in cases where you might want to withdraw more or less than the hypothetical 2% gain in the OP. Total time spend, approximately 15 seconds. Brokerage firms have an interest in making things as easy as possible for you.
A lump sum payment is the better option, for reasons previously stated. If you really want the annuity option, best you check the rules for individual lottery payouts. While some may pay equal installments over the 20-30 years, some may choose to pay on a sliding scale.
Why give your heirs a financial windfall when you can invest/spend the lump sum yourself? If your goal is to reduce the overall tax burden with the annuity, you are cheating yourself because above an arbitrary amount, the rest of the annual annuity is really meaningless.
[slight hijack]Suppose you bought (and live in) a state with a state income tax.
Can you escape the state income tax obligation by moving to a state w/o a state income tax. And if so, wouldn’t it make sense (tax wise) to go with the annuity pay-out?
And depending on the answer above, would it make any difference if the lottery was a multi-state lottery and you moved to from one of the states to another state that participates in that lottery?
