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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?
Working with your numbers, if I take the lump sum of $7,884,000 and invest in the S&P 500 for 20 years I would have $36,746,000 using the last 20 year period (8% return from 1992 to 2012). If I invested $540,000 each year for 20 years, I end up with $26,688,000 which is $10 million less.
However the last 20 year period was lower than the 100 year average. If I use 100 year average S&P 500 return of 9.6%, my lump sum ends up at $49,312,000 and the monthly payment ends up at $32,395,000.
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.
Possible, it would require you to keep several different accounts to be under the 100k FDIC limit.
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Originally Posted by cpg35223
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.
Hmm I wasn't aware of this little tax issue. Something to seriously consider.
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Originally Posted by cpg35223
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.
The main problem with such a windfall is most people are not equipped to handle so much money at one time. Statically, 70% of people to win the lottery are bankrupt in 5 years or less. Now I can't claim to be any more or less intelligent than these people, but I figure if I have to take the amount over 20 years, it will take me at least that long to blow it all.
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Originally Posted by cpg35223
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.
540k a year is more than enough for me to drop out of sight for quite a long time. Now if you talking about a more modest lottery winning like 1 million dollars, $26,000 really isn't enough. But than again the media really doesn't give a crap about minor lottery winners, nothing less them 10 million would even make the papers.
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Originally Posted by cpg35223
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.
While I certainly agree it's possible to earn a larger return by investing, most investors are MORONS. They are ruled by greed and fear. Google is a hot stock, $400 a share I got to buy me some of that. Then when Google price is falling. OMG I'm losing all my money, Sell! Sell! Sell! Most investors do the exact oppose of what you suppose to do to make money. They may have a couple of lucky scores, but a lot people who jump in and out of the market looking for the big score usually end up broke.
Last edited by TechGromit; 02-28-2012 at 12:52 PM..
The main problem with such a windfall is most people are not equipped to handle so much money at one time. Statically, 70% of people to win the lottery are bankrupt in 5 years or less. Now I can't claim to be any more or less intelligent than these people, but I figure if I have to take the amount over 20 years, it will take me at least that long to blow it all.
This is probably the best argument in support of taking the annual payments. In theory you can make a lot more by investing the lump sum, but in practice very few winners actually invest it as opposed to giving it away to family and friends and then blowing the rest.
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.
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That's one of the biggest reasons, if not the biggest! And estate taxes are due within nine months of date of death .
Some previous winners have become impoverished as a result of an unexpected death and the resultant tax consequences.
Regardless of whether you're 20 or 80, none of us know when our time is up.
Lump sum. Then put most of it into STABLE foreign currencies for the long term.
Our currency is quickly being devalued, and soon today's healthy annuity payment of $100,000 a year or so won't buy a loaf of bread. Think Weimar, Germany.
LUMP SUM is always best. Tomorrow isn't guaranteed so take it all at once, deal with all the taxes, etc. at once, and then be free to use the money and divide it up the way one sees fit. Remember, with the annuity option, if you suddenly are deceased, the payments will stop; and then there's devaluation of currency to worry about 30 years down the line. Your children will have nothing and you'll leave nothing behind. Always accept the lump sum and have your money managed well by professionals you trust - as opposed to an entity controlling when you get to have the money you won. I'd take it all at once and be at peace, having a great time instead of worrying about my next check or a conditional promise.
I'm not sure about the power ball but the mega millions is paid out over 26 years, not 20. According to their website you get approximately $38,500 for every million of the jackpot - BEFORE taxes.
So at a 20 million dollar jackpot one would get $770,000 per year for 26 years. I assume that kind of money would put one in the highest tax bracket and the rate might very well change of the course of 26 years.
I'd take the lump sum because I'm now old enough to start collecting social security and most likely would not live to collect it for 26 years. Might be like Ned Devine and keel over if I actually won.
Working with your numbers, if I take the lump sum of $7,884,000 and invest in the S&P 500 for 20 years I would have $36,746,000 using the last 20 year period (8% return from 1992 to 2012). If I invested $540,000 each year for 20 years, I end up with $26,688,000 which is $10 million less.
I know Donald Trump night disagree but for most of us, does that 10 million difference really matter. EITHER number is more money than most people would make in TWO lifetimes.
You could put the lump sum in you floor boards and it would last as long as you live.(depending on your age and how you spend it)
Would I rather have 36 mill than 26 mill? I guess, but to spend time on the debate is crazy, IMO.
(I know were just giving out scenarios here, so no dig at anyone here)
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That's one of the biggest reasons, if not the biggest! And estate taxes are due within nine months of date of death 
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