City-Data Forum If you won the lottery would you take payments or a lump sum? (pay, million)
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02-28-2012, 07:22 AM
 Location: Ontario, NY 2,590 posts, read 5,888,854 times Reputation: 2491

Assume (or dream) for one minute that you hit the lottery for say 20 million dollars. Would you take a lump sum or take payments over 20 years (Actually I think mega millions is over 26 years). Usually people say gimme the lump sum, but lets examine the math here for a minute.

If you take a lump some, The lottery takes about half right up front, than you get taxed on the remaining amount. Assuming 40% in taxes, this leaves you with a solid 6 million dollars.

If you take it in payments, 20 million dollars divided by 20 = 1 million dollars taxes at 40% = \$600,000 a year. After 20 years, you would have collected a total of 12 million dollars.

I believe the reason most people take the lump is they believe they can invest the money themselves and earn more money then just taking the payments.

So lets assume for a minute, that two people take the each payout type and don't spend a dime and invest the money. Who comes out ahead? Well if you start off with 6 million dollars, and invest it, you would have to get a 3.6% return on your investment every year to have 12 million dollars in 20 years. (actually you would need a 4% return if you included 15% taxes on your invest return)

So you need a 3.6% return on your 6 million lump sum to break even with the guy who took the payments. (assuming no taxes on your investment return) But I'm not quite done. The guy who took the payments is also investing his money, even if he got a modest 3.6% return on his money, he now has 19 million dollars after 20 years. So now you need a 5.95% return on your lump some to have the same amount of money as the more guy who took the payments instead of the lump sum.

And if you can get a 5.95% return on your investment with 6 million dollars, why can't you get the same return with 600k a year? Take payments is always better than a lump some. People believe they are some kind of financial genius when they have millions of dollars, but trust me, your just as stupid as when you only had 10k in your saving account.

Last edited by TechGromit; 02-28-2012 at 07:54 AM..

02-28-2012, 07:27 AM
 Location: Sierra Vista, AZ 16,116 posts, read 20,158,474 times Reputation: 8204
At my age, betting on 20 years is has higher odds than winning the Lotto. I'll take the cash

02-28-2012, 09:05 AM
 Location: Censorshipville... 2,478 posts, read 5,993,818 times Reputation: 1270
I'd take the lump sum to blow on goddesses and briefcases of cocaine.

02-28-2012, 09:12 AM
 20,793 posts, read 52,393,704 times Reputation: 10471
I don't know if it is still the case but it used to be that if you died your survivors did not continue to get the payments which is why they moved to having a lump sum option.

I would still take the lump sum and invest. Basically the lottery is an annuity and with that dollar amount going into the annuity you can achieve similar rates, if not better, since you would have the option to invest in other vehicles for better returns. Not everything is losing money right now and the Dow is more than double what it was at the low of around 6500. I would have loved to have 6 million to capitalize on that growth

02-28-2012, 09:38 AM
 Location: southwestern PA 20,426 posts, read 35,741,970 times Reputation: 38829
Lump sum for me.

02-28-2012, 09:42 AM
 35,121 posts, read 37,842,380 times Reputation: 61845
Quote:
 Originally Posted by TechGromit Assume (or dream) for one minute that you hit the lottery for say 20 million dollars. Would you take a lump sum or take payments over 20 years (Actually I think mega millions is over 26 years). Usually people say gimme the lump sum, but lets examine the math here for a minute. If you take a lump some, The lottery takes about half right up front, than you get taxed on the remaining amount. Assuming 40% in taxes, this leaves you with a solid 6 million dollars. If you take it in payments, 20 million dollars divided by 20 = 1 million dollars taxes at 40% = \$600,000 a year. After 20 years, you would have collected a total of 12 million dollars. I believe the reason most people take the lump is they believe they can invest the money themselves and earn more money then just taking the payments. So lets assume for a minute, that two people take the each payout type and don't spend a dime and invest the money. Who comes out ahead? Well if you start off with 6 million dollars, and invest it, you would have to get a 3.6% return on your investment every year to have 12 million dollars in 20 years. (actually you would need a 4% return if you included 15% taxes on your invest return) So you need a 3.6% return on your 6 million lump sum to break even with the guy who took the payments. (assuming no taxes on your investment return) But I'm not quite done. The guy who took the payments is also investing his money, even if he got a modest 3.6% return on his money, he now has 19 million dollars after 20 years. So now you need a 5.95% return on your lump some to have the same amount of money as the more guy who took the payments instead of the lump sum. And if you can get a 5.95% return on your investment with 6 million dollars, why can't you get the same return with 600k a year? Take payments is always better than a lump some. People believe they are some kind of financial genius when they have millions of dollars, but trust me, your just as stupid as when you only had 10k in your saving account.

Lump sum because I want to and don't want to have to deal with the government any more than necessary for the next 20 years. If that makes me stupid then so be it. Why would I voluntarily allow the government to make interest for free on my money for 20 years? I'd rather bury it in coffee cans in the side of a glacier.

02-28-2012, 09:46 AM
 Location: NJ 17,579 posts, read 38,320,873 times Reputation: 16099
I think your assumptions are off to start with. There are currently two lotteries going in NJ.

Megamillions - Jackpot is curently \$94 million, lump sum is \$68.9 million. Reduced by 26.7%.
Powerball - Jackpot is currently \$40 million, lump sum is \$25 million. Reduced by 37.5%.

Now I don't know if the percentages change as the jackpot changes, but it certainly isn't 50%. And isn't the highest tax bracket 35%?

I would take the lump sum.

02-28-2012, 09:53 AM
 6,030 posts, read 6,528,564 times Reputation: 8305
I used to muse about this issue: how I would choose, how I'd invest it (and who I'd give how much money to).

That is until a friend whose last nerve I'd apparently gotten on said -- idiot -- if you took the lump sum and put it in your mattress it'd still be more money than you'd ever make (and likely spend) in a lifetime -- so it doesn't MATTER what you do with it or how you receive it -- as long as you don't BLOW IT -- and start living like Donald Trump,

Ever since then I figured I'd go conservative, live off the interest and tap maybe a BIT of the principle.

Personally, I'd take the lump sum. But let me back up.
IF the annuity is inheritable, my TRUE preference would be to I take the payments spread out -- but in my case I want to give money away to family and friends, so for me, I'd rather take the lump sum give them their money and be done with that part of it. VERSUS, take the annuity payments and have to dole out their money to them over the years (because with the payments I wouldn't be getting enough to give them their total and keep enough for me)

A financial advisor I heard did point out that the annuity is easier to MANAGE. Getting 10 million at once, what do you do with it where to you put it. You can't put it in a bank, it won't all be insured. Even spreading it out you have to find a lot of places for 10 million or more....vs, say 500,000 a year.

Some other good advice from a website, if you win REALLY BIG:
-- DON"T tell anyone, keep acting like nothing happened, keep the ticket secure
-- Get good lawyers (tax and estate), CPA, etc
-- Think about a trust, to stay anonymous, if you can and lottery and your state rules allow it
-- Also, before you cash in the ticket -- IF you can pay all your bills a month or two ahead, leave your house, forward your mail (or have it held at the PO), and go to a hotel (just for the week or two after you claim the prize). (MAYBE think about disconnecting your phone for a bit) Lay low.
-- SEE if you've been able to stay anonymous. Have the media found you, or figured out who you are? Are you getting mail and phone calls from crazy folks begging for money, etc.
-- Once the initial period after your claim dies down....go back to living your life, and do what you want: move, stay where you were, quit your job, whatever.....

Last edited by selhars; 02-28-2012 at 10:08 AM..

02-28-2012, 10:01 AM
 28,906 posts, read 45,227,864 times Reputation: 45815
Lump sum. For several reasons.

1) A \$1 million annual payout twenty years from now won't be worth nearly as much as that same \$1 million today. At least with a lump sum payment you have it all right now. Even if you simply put it in a bank, an extra deposit policy through the FDIC, will guarantee your money's safety. Then you have the ability to move it about at leisure.

2) What if you die in the next twenty years? The government will tax your estate based on your total winnings, rather than what you've actually received. So if you kick off after only getting \$5,000,000 of a \$20,000,000 lottery win, the government will be taxing your survivors for that other \$15,000,000, even though that money has not arrived yet. The tax code is so screwed in fact, that people have been forced to take out very expensive life insurance policies just to pay off the taxes in case they die before collecting all their winnings.

3) If you win \$1,000,000 a year for twenty years, that really doesn't give you the same kind of lifestyle that winning \$20,000,000 in one lump sum does. Think about it. In year one, you pay off your household debt, pay your taxes, and then...you wait for the next installment. Instead, with a lump sum, you pay off the same amount of money, pay off the taxes all at once, and then have a very large sum to invest and start enjoying dividends, interest, whatever.

4) Getting a lump sum gives you enough cash and flexibility to go incognito awhile. As in pick up and leave town. With only receiving 1/20th of the payout, you don't enjoy as much.

5) I really don't trust the government to not pull a switcheroo on me in the next few years regarding my taxes or even default on the payout. I'd rather have the money now, thanks, so I can shelter it if need be.

02-28-2012, 10:20 AM
 Location: Ontario, NY 2,590 posts, read 5,888,854 times Reputation: 2491
Quote:
 Originally Posted by manderly6 I think your assumptions are off to start with. There are currently two lotteries going in NJ. Megamillions - Jackpot is curently \$94 million, lump sum is \$68.9 million. Reduced by 26.7%. Powerball - Jackpot is currently \$40 million, lump sum is \$25 million. Reduced by 37.5%. Now I don't know if the percentages change as the jackpot changes, but it certainly isn't 50%. And isn't the highest tax bracket 35%?
When I purchase tickets, I always take the Annuity.

Ok, lets re-run the numbers. So the Mega Million lottery is 20 million dollars, you win, take the lump sum, you end up with \$14,600,000 before taxes. True the highest Federal tax bracket is 35%, but now the state wants a portion of that cash too. (at least in NJ), so Federal plus 11% for state equals 46%, you end up with \$7,884,000. I on the other hand, end up with \$540,000 a year or a total of \$10,800,000 over 20 years.

You need to earn 1.9% interest over 20 years to equal my \$10,800,000 over 20 years (including taxes) just to break even with me. Now if I invested my money at 1.9% interest, I'd have 14 million dollars, you would now have to earn 2.9% interest to equal me.

The same theory applies, if you can earn more interest on \$7.8 million, why can I earn more interest in \$540k?
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