What are those $1 million dollar game prizes really worth, in money in your pocket terms?

Miscellaneous and Personal Stuff I Must Share
1

The particular show doesn’t matter, what you have to do doesn’t matter. It doesn’t matter if you had to be extremely brave or smart or lucky or whatever. There just seems to be a whole lot of TV competition/reality shows that start with a group of players and end up with the lucky finalist getting ONE MILLION DOLLARS!!! Instant riches, right?

But I’ve seen plenty of mini-interviews with such winners, and they always ask what they’re going to do with their money. And a whole bunch rattle off the same dreams: a down payment on a house, pay off my college and other debts, finally buy a new car, treat my parents to a month long cruise, help out my relatives with medical/education bills, start my own business… On and on. And I start thinking: You’re delusional. It’s not X AND Y AND Z, way more likely it’s Pick one.

Am I right?

Okay, circumstances vary depending on where you start. Let’s assume you are around 26 years old. You’re at most two years into your ‘career path’ if you’ve even figured out what that is. You DO have significant education debt. You are renting a basic apartment, maybe sharing one with another similar getting started type person or two. You have a car that mostly runs, most of the time, but is nothing to brag about. You’re making something on the 50-80k spectrum with the usual benefits but you have no inherited trust fund or the like.

And now you’ve won $50k/year for twenty years, probably. So you go with one of those companies that will take that guaranteed money and give you a single payment of $XXXXXX.XX right now.

How much is that likely to be?

Of that, how much vanishes into Federal and State taxes instantly?

What are you realistically looking at in the remainder?

Enough for a house deposit, but not in a city?

Enough to buy a new car outright, but an ‘ordinary’ sedan not something WOW?

A nice ski vacation every year for a decade, maybe?

Maybe you can buy a franchise in some chain, though not one of the TOP tier ones. Maybe you can set yourself up as an independent tradesman in whatever?

Just … how wonderful a boost is that one time windfall?

2

Why are you assuming the payout from a game show is an annuity not a lump sum? IME/IMO gameshows pay lump sums. Now the default payout from e.g. Powerball is an annuity, but you can get a lump sum payout If you want.

This distinction is real important because when e.g. Powerball advertises a $1M prize, what they mean is a series of payments spread over 20 or 30 years that will total $1M. Which is a very, very different thing from paying $1M in cash right now.

And that difference is before we start discussing taxes.

So which scenario are you really trying to ask about?

  1. The prize is $1M paid all at once but net of taxes, etc.
  2. The prize is some series of payments over some term of years divided according to some complicated rules, and whose headline value totals to $1M, before taxes.
3

One thing I like about lotteries in Canada – at least, the ones run by governments – is that the advertised cash prize is accurate – full lump sum payout, and tax-free. So if you win, say, a $25 million jackpot, you literally get a cheque for $25 million from the lottery office, with no tax liability. Even so, I haven’t bought a lottery ticket in probably more than a decade.

4

Even if it is $50k per year for twenty years, if that’s on top of whatever job you already had that was presumably enough to survive on, it still gets you a lot. One year of that gives you a pretty nice car. A few years pays off your college. It gives you a cushion for starting your new business, so you can survive a few years without the business being profitable. It might not give you all of that all at once, but it could still get it all eventually.

5

Not necessarily.

In some of them, the fine print says they will pay the annual amount but only to the living winner. So if they die before the 20 years are up, their estate does NOT get the remainder – it reverts back to the lottery. The heirs get only what the winner has saved from the $50K payments.

6

Many years ago I read about the 29 year spread in payments, and once I had a vcr I taped and froze the fast screens of text that they showed at the end credits of one of those reality shows and it also talked about paying out over twenty years, and I just assumed that was the standard for such games. Well, at least the ones with million dollar type payouts. If you win 100 boxes of Rice-a-Roni on Let’s Make a Deal, I’m sure they’ll give it to you all at once (and almost certainly be happy to just give you a check for the value instead.)

7

right

Taxes might eat as much as 40% Feds (37% is the top rate, and it is wise to over-withhold, and 10% State. But then you would get some tax refunds.

So? It still gets the winner all of that.

8

Same in Australia. Tax is paid invisibly by the Lotteries so the winner gets the actual promised prize. Further taxes only happen when you start doing something with it, but that’s just normal transactional processes.

9

Re: Canadian lotteries wolfpup tells us:

To which I will add: Yeah, but’s it’s $25 million in play Canadian Monopoly money. Big deal–that’s about $16,640 in real dollars.

What?

Oh. OK, I’ll just see myself out, eh?
:face_with_spiral_eyes:

10

No, not all of the $1 million.

If it is paid at $50K per year, and the winner dies after 6 years, they will only have been paid $300K. There remains 14 years or $700K unpaid – under these rules, that reverts to the lottery and is never paid to the winner or their heirs. So this fine print can work well for that lottery.

11

Not exactly, at least, not in Canada. For example, the Ontario Lottery and Gaming Corporation (OLG) is a non-profit Crown corporation that doesn’t pay income taxes in the ordinary sense on its revenues. Instead, 100% of its profits are invested directly into public services, health care, and other worthy causes including arts and culture. But at any rate, the end result is that winners get 100% of the prize money and incur no tax liability.

12

It’s the same for all forms of gambling in Canada. Lotteries, bingo, casinos, horse racing—nothing you win at any of them is taxable. You’ll keep everything you win.

13

And I remember when Wintario started in the mid-70s with the unimaginably large prize of $100,000! Talk about being rich!!n

14

Let’s say you live in California and won exactly $1 million in lump sum cash in the California lottery in 2025. CA does not tax the CA lotteries, so you will only have had to worry about Federal tax. Let’s further stipulate that you are a hotshot surgeon with a very large income - $626,350 to be exact that year. You then will be taxed at the Federal maximum of 37% (which for 2025 kicked in at incomes above $626,351). So you will get to keep $630,000 after taxes, ignoring specific deduction complexities.

Since nobody knows what you make before you file your taxes, the Feds demands a cut of 25% off the top from all legitimate prizes before you are even handed your winnings. So the CA lottery folks will cut you a check for $750,000, pay $250k to the Feds for you and you will then be responsible for the additional taxes, if any, at tax time.

This incidentally is how those ‘win a $5 million home!’ raffles “scam” you in a perfectly legal way. Because they WILL give you a $5 million dollar home, but they are also disclosing the prize to the Feds and the Feds want a 25% cash value in taxes for that prize today. Don’t have $1.25 million in cash on hand to pay your taxes on that $5 million home? No problem - the raffle will offer you an alternate $700k cash prize as specified in the fine print instead and pay your 25% taxes out of that. Easy-peasy.

Now let’s say it’s the same conditions but you are a CA resident who wins a $1 million dollar raffle or game show prize. CA does tax those, so you would owe an extra 7% to the state come tax time. So you will get to keep $560k in the end, again ignoring specific deductions complexities.

Every state is different in how they tax assorted winnings but the Federal taxes are an absolute and it is just based on income tables and relevant deductions.

15

Couldn’t you take a loan to pay the tax?

Use your newly-won home as collatteral, take a loan for $1.25 mil , sell the house for $5 million, pay back the loan to the bank , (with interest, say 1.4 mill, tbe bank should be happy, right?), and you keep 3.6 million. Pay 37% tax and you have 2.2 million profit, and you beat the scam.

What am I not understanding?
,
6

16

How would the timeline on that work?
You win the house, but the paperwork for the transfer would take some time, and in the meantime the government wants their money now. You don’t own the property free and clear just yet so you can’t get the loan.

17

Aren’t banks willing to take risks?
If I want a loan of $1.25 million as a private citizen/businessman for my business (say, a farmer needs fertilizer and a new combine tractor), the bank examines my credit risk and sets its interest rate.
In this case, where the $5 million house is publicly acknowledged , the risk to the bank is negligible.

18

There is an amount of time before the house is yours free and clear, and the bank isn’t going to lend money on property you don’t own free and clear. If you decide to sell the property that too will take time (putting it on the market, inspections, finalizing the deal etc.). Once again, how long are the Feddies willing to wait for their share of the winnings?

19

Moe and his friends will be happy to front you the Fed tax money for a reasonable consideration. Your collateral for that may involve busting some knees should you not understand the payment schedule​:grimacing:

20

Ahh, OK.

Under that annuity payout approach, there is no way to compute a general answer to your question. It depends on how many payments over how long a time, what interest rate they are using, whether they use a level payout, or a rising payout over time advertised as an inflation correction, etc.

But we can give some general guidelines. Powerball (“PB”) publishes a pretty clear explanation of how their annuity payout works:

Powerball jackpot winners may choose to receive their prize as an annuity or a lump sum payment (cash option). Both advertised prize options are prior to federal and jurisdictional taxes. A jackpot winner who selects the annuity will receive one immediate payment followed by 29 annual payments that increase by 5% each year.

The cash value option, in general, is the amount of money required to be in the jackpot prize pool, on the day of the drawing, to fund the estimated jackpot annuity prize. The advertised jackpot annuity and cash value are estimates until ticket sales are final, and for the annuity, until the Multi-State Lottery Association takes bids on the purchase of securities. Check with your lottery for its rules on how to claim a jackpot prize and the correct procedure for selecting the annuity or cash value option.

Right now as I type PB is estimating tomorrow = Wed’s draw to have a $69M headline jackpot defined as the sum of the 30 payments over 30 years. But if you want all cash all right now, they expect to pay out $31.2M. Which is 45% of the headline number.

To clarify what that means, after the drawing they expect to have $31.2M to hand out. If you want it all now, you can have it all now. If instead you want the annuity, they will spend every one of those 31.2M dollars to buy an annuity which will pay 30 payments, each 5% larger than the last, with the first payment right away and the last payment 29 years hence. And it so happens that for the current interest rates, and the 5% rising payout rate, that $31.2M happens to buy an annuity whose 30 payments happen to add up to $69M.

The only financially sensible way to look at it is as a $31.2M payout. Money has value over time. Time affects the value of money. The 69M number is just to fool the rubes. It’s valid arithmetic, but it’s financial flimflam.

Over the years I’ve been watching PB, the cash/annuity ratio has fluctuated between almost 60% and down near 40%. It’s all a matter of what prevailing interest rates are, and whether the so-called “inflation correction” rate is 0%, 3%, 5% or whatever.

So we can take a WAG that for any $1M prize offered on the same terms, it’s really approximately a $450K cash prize.

Then we take out taxes.
If, like me, you live in a no-income-tax state, the Feds “only” want 37%. Because federal income tax rates are progressive, depending on what your pre-existing taxable income is, you may be paying 37% on all of the win, or only on part. Call it a 35% Federal tax hit on average, leaving you 65% of the payout. That’s $450K * 0.65 ~= $290K.

If you live in an income-taxing state, the total tax bite is about 40% (as noted above). So you keep 60% of the $450K = $270K.

From here down I’ll use the state-taxed $270K figure.

Then, if you want to keep the principal intact and live off the income from investing your $270K, it gets even less fun. Typically you can earn 2 or 3% above inflation with near total safety. 2% of $270K is $5,600. Yep, a bit over 5 grand. Per year. That you can spend.

But wait! There’s more!

You’ll have to pay income tax on your investment earnings. So 25-30% of the interest you earn on your $270K goes to the Feds. If we call it 25%, you can spend $5,600 * 0.75 = $4,200 yr.

Bottom line:
A $1M headline prize that’s worth $1M only if you naively add up 30 annual payments, that is actually awarded as cash today sets you up with about $4 grand per year of spendable income if you want to keep the principal intact over time.

If you’re willing to spend the prize principal too, now it’s just a matter of how long you want your one-time windfall of $270K to last: a week, a month, a year, 10 years?

You can see how winners quickly go broke thinking a) the headline $1M is a real number, and b) thinking it buys a big lifestyle in perpetuity. It does not.