Smart Lottery winner

[DrPizza]

I thought that the cash payout was simply the equivalent of what it would take to invest in an annuity to have the return of 1mil over the 20 years. i.e. Neither is necessarily better. If you invest your lump sum in low risk investments such a savings account, you won't come out ahead. In her situation, I think she may actually have made a wiser decision. With such a low payout (1 million), the lump sum vs. 20 annual payments seriously changes the amount of tax she's going to pay on that money.

Regardless, I'm pretty sure the bean-counters who figure out the lump sum vs. annuity are pretty good at what they do. It's not going to be that big of a difference, unless she VERY wisely invests the money.

 

[mrrman]

id take the payout on any sum

 

[Anonemous]

Originally posted by: DrPizza
I thought that the cash payout was simply the equivalent of what it would take to invest in an annuity to have the return of 1mil over the 20 years. i.e. Neither is necessarily better. If you invest your lump sum in low risk investments such a savings account, you won't come out ahead. In her situation, I think she may actually have made a wiser decision. With such a low payout (1 million), the lump sum vs. 20 annual payments seriously changes the amount of tax she's going to pay on that money.

Regardless, I'm pretty sure the bean-counters who figure out the lump sum vs. annuity are pretty good at what they do. It's not going to be that big of a difference, unless she VERY wisely invests the money.

Like betting it all on black or buying 1million lotto tickets when another huge jackpot comes.

 

[UF Matt]

If you have any investing sense worth a lick, you'd get the lump sum and earn a cool 7-10% a year.

 

[0roo0roo]

Originally posted by: mugs

Originally posted by: greatfool66

Can someone do the math for me to see if $325,000 gaining 6% interest a year compounded over 20 years will be worth more than $690,000? Thanks.

325,000*1.06^20= 1,042,319

That woman was dumb. Money has time value...

That assumes she doesn't spend any of it. For a fair comparison, you'd have to add interest to her annuity payments if she didn't spend them.

yup, as if you aren't going to spend anything for 20 years lol she'd be 52 by the time she got to spend a dime single mothers got a decent amount of expenses

 

[markgm]

I don't have the time to figure this out here, but if I'm bored at work I might do the calculations. Here is a link on the subject: Text

A lot of assumptions are being made by the people posting here, so everything needs to be kept equal. If you take the lump sum and invest it, you're first hit with getting half or so of the 'advertised' jackpot. Then you're hit with taxes. When you invest the money, then you are again hit with capital gains tax on your earning.

If you take the annuity you're (or rather, the state) is investing your money 'pre-tax' much like a 401(k). Most everyone thinks 401(k)'s are a good idea, right?

If you want to compare apples to apples, take the yearly payouts (someone listed them above) and invest that each year, and see how much you have after 20 years vs. investing the lump sum for 20 years. Apples to apples folks!

 

[BMdoobieW]

This is how I understand it: The lump sum is about half of the annuity payout. As others have said, taking the lump sum and investing most of it will result in you having more money after 20 years than if you just took the annuity.

 

[50cent1228]

if i got like 1 or 2 mill,iwould ihave took the plane...but anything over50mil and give me the lump sum

 

[FreshPrince]

Originally posted by: UF Matt
If you have any investing sense worth a lick, you'd get the lump sum and earn a cool 7-10% a year.

how would you do that? don't tell me in stocks...

 

[Pepsi90919]

how's that smart? now the lottery company gets to make interest for 20 years.

 

[Wreckem]

Originally posted by: cKGunslinger

Originally posted by: mugs

Originally posted by: cKGunslinger
I thought it came into play if the bank collapses, *or* if it's robbed, etc.

Banks only keep a small amount of cash on hand

True, which would bother me even more. What if I have a need for a $3M impulse purchase?

You ask your bank to contact its Federal Reserve branch and it'll be there the next day. Same day if you happen to live near a Federal Reserve branch.

 

[Kelemvor]

I'd take the yearly payments depending on how much it was. If I could basically live off the yearly payment, then I'd do that. If not, then I'd just take it all at once.

 

[JEDI]

Originally posted by: sygyzy

Originally posted by: cKGunslinger
I'd take the lump sum and head straight to a financial adviser/investment broker.

So where do you safely keep $50 million while you are sorting out long-term solutions? Just deposit the check at your local bank? What about the FDIC $100,000 limit? An issue or not?

I asked this question and nobody could answer me. Imagine how much of a hassle it is to distribute your 100M amongst 1,000 banks. Most of the answers I got where: Rich people don't have all their money in cash, it's in assets so this is not a concern. That doesn't answer the lottery question though.

Ameritrade is $50M.

so you can distribute it among several brokage houses.

and if you are still paranoid, buy $50M worth of a s+p 500 mutual fund.

 

[DrPizza]

Originally posted by: Pepsi90919
how's that smart? now the lottery company gets to make interest for 20 years.

A lot of people don't really seem to get it. When you win $1 million dollars, the 1 million dollars isn't actually there. There's actually a few hundred thousand dollars there. i.e. there exists the amount of money necessary to invest in an annuity to pay $1 million over the course of 20 years. The annuity is, of course, earning interest. That's been factored in already!

In other words, your choices are:
A. Receive 50k per year for 20 years = 1 million total over the course of 20 years
B. Receive the amount of cash necessary to invest in a relatively low risk investment vehicle in order to be able to withdraw 50k per year for 20 straight years.

However, in the case of A, you pay tax on that 50k each year. 50k doesn't necessarily put you into a higher tax bracket. But, in the case of B., you take a big hit up front on taxes at (most likely, unless you're already in the higher tax bracket to begin with) a higher rate. Thus, you won't (I don't think) have enough money left over after taxes in order to purchase an annuity that would pay 50k per year for 20 years. Plus, each year, you'd have to pay tax on any interest earned.

I could be wrong; perhaps the cash payout is higher to balance out the taxed amount such that you'd still have enough after tax dollars left to purchase that annuity; I'm not positive which way it swings. Regardless, you need to be somewhat aggressive in order to end up with more money at the end of 20 years. (And, obviously, many lottery winners aren't that gifted in investing.)

 

[BooGiMaN]

i hope they dont have lottery rules like in calif...

i believe if you die thats it...the family cannot inherit the money that has yet to be paid out to you in installments from the lottery win...it goes back to the state

 

[SSSnail]

You guys forgot one option: take the money and leave the country, then invest it.

 

[oogabooga]

Good for her. I'd say she is smart.

When one of you superstuds of ATOT win the lottery you can do what you want. This woman knew she had an issue, and decided to take the best course for long term security. Just cause you wouldn't do it for yourself, doesn't mean it's the wrong choice for her.

 

[NikolaeVarius]

Couldn't she have taken the lump sum, and put it into an account that caps withdrawal at 10,000 a month no matter what?

I'm not really good with these kind of things

 

[dullard]

Originally posted by: ElFenix
dullard, iirc, did the math one day. the results were that for smaller winnings, it is better to take the annuity because the difference in income taxes is so large that you would need nearly 10% rate of return to catch up by investing.

People read my posts!

Often, the math is shown for a medium to large lottery and, yes, you can be better off if you take it all at once and have a great investment strategy. But, a large percentage of lottery winners blow it all and after a decade or so they are broke and bankrupt. Thus, if you are that type of person, take the annuity.

Also, for smaller lotteries, the tax bracket argument alone makes the annuity usually better.

Simple logic tree:
1) Is it a small lottery? Yes, take the annuity. If no, answer the next question.
2) Will you blow it all? Yes, take the annuity. If no, answer the next question.
3) Will you invest it wisely? Yes, take the lump sum. If no, take the annuity.

 

[cKGunslinger]

Originally posted by: dullard

Originally posted by: ElFenix
dullard, iirc, did the math one day. the results were that for smaller winnings, it is better to take the annuity because the difference in income taxes is so large that you would need nearly 10% rate of return to catch up by investing.

People read my posts!

Often, the math is shown for a medium to large lottery and, yes, you can be better off if you take it all at once and have a great investment strategy. But, a large percentage of lottery winners blow it all and after a decade or so they are broke and bankrupt. Thus, if you are that type of person, take the annuity.

Also, for smaller lotteries, the tax bracket argument alone makes the annuity usually better.

Simple logic tree:
1) Is it a small lottery? Yes, take the annuity. If no, answer the next question.
2) Will you blow it all? Yes, take the annuity. If no, answer the next question.
3) Will you invest it wisely? Yes, take the lump sum. If no, take the annuity.

:thumbsup: Sounds like a plan.

 

[Kwaipie]

Straight Dope: Uncle Cecil says...

 

[dullard]

Ok, I did the math for this example.

Assumptions:
[*]25% federal bracket with annuity. 35% federal bracket with lump sum (for first year only, then back to 25% tax bracket).
[*]Since I don't know the state, I'll just assume a straight 6% state bracket.
[*]Lump sum is $500,000 (half is typical).
[*]10% net return on investments each year.
[*]Cash value, tax on payments, and investments made on the first of the year to make the math easy. Tax on interest paid at the end of the year as is typical for income tax payments.
[*]She invests EVERY cent.

If she takes the lump sum:
[*]Year 0: 41% tax. $295,000 after tax. $29,500 in interest. $12095 tax paid on interest. $312,405 after end of first year.
[*]Year 0: 31% tax. $31,240 in interest. $9684 tax paid on interest. $333961 after end of 2nd year.
[*]...
[*]Year 20: 31% tax. $110,993 in interest. $34,408 tax paid on interest. $1.19M total at end of 20th year.

If she takes the annuity:
[*]Year 0: 31% tax. $34,500 after tax. $3,450 in interest. $1069 tax paid on interest. $36,880 after end of first year.
[*]Year 0: 31% tax. $34,500 gained after tax. $7,138 in interest. $2213 tax paid on interest. $76306 after end of 2nd year.
[*]...
[*]Year 20: 31% tax. $153,003 in interest. $47,431 tax paid on interest. $1.64M total at end of 20th year.

Anniuty is nearly half a million MORE at the end of 20 years with a 10% return on investments. The higher tax bracket from the lump sum kills the deal. With such small amounts, she can't recover enough to make up for that high tax right at the beginning.

 

[Liviathan]

9 kids!

 

[Howard]

At least with the annual payments, you don't get people bugging you for ****** as much.

 

[DrPizza]

:thumbsup: to dullard and straightdope. It's almost funny that the majority of people would take the cash up front, THEN go to a financial advisor.