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Your scenario makes a lot of assumptions about what is “right”.
Keep the money in the bank? How many banks to keep it fdic insured? Does having that many banks increase your risk of fraud and mismanagement?
By avoiding risk to your money by not investing, you’re basically locking in an even greater risk by having inflation chip away at it. While I wouldn’t put it in risky investments, I wouldn’t avoid market risk at the expense of taking huge inflation risk.
When you’re talking about the lower marginal tax brackets, that would barely put a dent in your effective tax rate. You would quickly hit the cap each year so it would be a minor consideration.
I’d rather have the money upfront and have the time value of money working for me. When you basically have f u money, I wouldn’t go purely to optimize my payout by slowly being paid. That takes away the allure of a huge lottery winning.
Personally, I would take the lump sum. Half would be open to spending. Half would be locked away to kick out returns for life. I would pay 2 or 3 elite financial advisers/attourneys for high net worth individuals working independently and they would be audited by one of the big four quarterly.
Then I would spend all of my time doing only what I wanted to be doing.
So does your name, but in the event someone that's not ever made money before falls into substantial wealth that will pay for their lifetime consumption hundreds of times over, the last thing they should do is invest it and take on market risk. There's simply no such thing as risk free investment. There is such a thing as getting excess deposit insurance however.
Imagine going to prison for shoplifting candy at a store and being sentenced in a maximum security with death row inmates. You're seeking safety at that point amongst the wolves. Inversely, that's where the lottery winner is among the truly wealthy...and the smart one puts the money in the bank and just worries about consumption.
So does your name but in the event someone that's not ever made money before falls into substantial wealth that will pay for their lifetime consumption hundreds of times over, the last thing they should do is invest it and take on market risk. There's simply no such thing as risk free investment. There is such a thing as getting excess deposit insurance however.
Imagine going to prison for shoplifting candy at a store and being sentenced in a maximum security with death row inmates. You're seeking safety at that point amongst the wolves. Inversely, that's where the lottery winner is among the truly wealthy...and the smart one puts the money in the bank and just worries about consumption.
The moment we just shared when I got it. I think I love you right now.
Last edited by Thatsright19; 04-04-2018 at 09:36 AM..
If you won $1,000,000 in the lottery, which would you prefer , if your opportunity cost of capital was 5%/year and constant over time:
1. The lump sum, now.
2. An annual payment of $129,500/year for 10 years, or
3. An annual payment of $80,240/year for 20 years?
If you won $1,000,000 in the lottery, which would you prefer , if your opportunity cost of capital was 5%/year and constant over time:
1. The lump sum, now.
2. An annual payment of $129,500/year for 10 years, or
3. An annual payment of $80,240/year for 20 years?
Why?
Let me crack out the old tvm solver....
Or I’ll hire someone to do it because I’m off to the beach.
I would take the lump sum no matter what & for one reason: I want control of that money, not the state, not a lottery fund. Lottery funds can disappear.
What if the state legislature closes the lottery fund due to financial exigency or corruption? Or any number of possibilities? At best I would have to pay lawyers to get the rest of my money.
No, give me the money now and I'll take my chances.
#1 lesson I remember from economics class: money now is always more valuable than money later.
I would take the lump sum no matter what & for one reason: I want control of that money, not the state, not a lottery fund. Lottery funds can disappear.
What if the state legislature closes the lottery fund due to financial exigency or corruption? Or any number of possibilities? At best I would have to pay lawyers to get the rest of my money.
No, give me the money now and I'll take my chances.
#1 lesson I remember from economics class: money now is always more valuable than money later.
Ha ha yes! I remember my professor distinctly in my finance class: "More is always better than less, and now is always better than later."
And I agree. I'm taking the money now because I am pretty sure a) if it's a big enough amount, and pretty much any lottery winning amount is going to be unless it's just one of the $1 million jackpots, I'm already going to have enough to last me the rest of my life, b) I don't need a whole lot to be happy and I don't think winning the lottery is going to change that much, and c) I have more confidence in my own investment and money management skills than I do any state government.
I get you don't get the entire amount for various reasons, but it's still a lot especially at the higher levels.
I think most do. One reason being that something might happen (bankruptcy or whatever) that would stop your payments in the future. A bird in the hand theory. There may also be a law that your heirs don't get it, when you die, so may not get the whole amount.
I would take the lump sum because how do you know you will be alive to enjoy all that money heck no give me the lump
sum. exactly and I would make a will also saying that I want the rest of it should something happen to me my kids and husband would share equally what was left .
First, if I died, the inheritance taxes on the total of the lottery winnings would immediately come due to my heirs. There have been cases of this.
Second, especially when you look at a state such as Illinois delaying payments on lottery payouts, I wouldn't trust the government in the future to make its payment to me.
Third, I'd rather have the lump sum just in case I decided to ever leave the country.
1000 Percent agree to this!!!!!!!!!!!!!!!!
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