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If you are younger than middle aged, then lump sum should be on the table.
OTOH anyone getting near or past the "bad side" of 50 ought to seriously consider taking lump sum.
We none of us know how long will live, thus can only go by statistics. This and of course one's overall general health, lifestyles and so forth.
Taking lottery winnings over a period of time allows greater management of taxation and financial planning. OTOH depending upon which state one resides at time of winning, the local taxes alone can be a huge hit from a lump sum payout.
Live in NY which (surprise, surprise) has one of the highest taxes on lottery winnings. So if one were still in my twenties and hit Mega Millions or Powerball for a fairly large sum; would likely take long term payout. This would allow me to get the heck out of NYS and establish residency in a low tax state.
Could always buy a home and come back to "visit" New York. Long as don't stay longer than 183 days won't be considered a resident for tax purposes.
Finally one good thing about taking long term payout from lottery is it acts as a sort of annuity. Far to many hit large lottery payouts (and take lump sum) and are busted broke < ten years or so later
You always take the lump sum, always. The faster you get it out the government's hands and pay all your taxes, the better.
You do not want the government holding your money without interest. That's asinine.
The interest is in the implied money factor or discount rate they use for the notional lottery amount (stated jackpot) vs. lump sump payout.
They changed the methodology several times it started with an annuity payout amount of 20 years then pushed to 25 and now at 30. Essentially they can use these changes to jack up the jackpot payout amount.
For example $1,000,000 that the lotto has to payout today can be advertised as a $2.0M jackpot 20 years from now or $2.8M jackpot 30 years from now (using a 3.5% multiplier). The same amount of money is required today from the lotto regardless of payout just at 30 years it makes the amount seem so much larger and more people will play.
Aside from the annuity period they have also increased the discount rate as well that is implied in the lump sum. The spread between the annuity payout and lump sum is computed using 30 years and a discount rate. Over time they have increased this rate to keep up with inflation but the discount rate has increased far faster than inflation.
The 3rd issue is with the overall payout ratio... Initially powerball was sold to the public that they would target a 50% payout ratio and the remaining amount would go to local states to fund education. Over time the payout ratio has dropped to ~35% over time and has been diverted to other programs (Penn funds the elderly, Wisconsin subsidizes property taxes, Minnesota has an environmental fund).
Finally the feds get the ~37% back in the share that you win and states will also collect their state income tax as well (essentially double taxation).
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.
Depends who you are, honestly. I already have lots of money, and yes I do get well over 6% on my investments. I would take the lump sum because I have private investment opportunities that the average person doesn’t have or know about so for me the math would be obvious. Aside from that I’m already set with what I have so I’d rather have the lump sum because it would more immediately change my life than $600K/year would.
I wouldn’t do the lump sum. It’s not tax efficient. The 37% bracket is really ugly.
Agreed, I probably would take the payments as well on a PB / MM jackpot. It would allow me to build in a proper tax plan, estate/trust plan, and an efficient asset allocation strategy.
Even someone with significant financial knowledge would struggle to invest wisely if they became flush with $100M - $200M at once. Give me $10m/year over 30 years and I could deal with it just fine.
I didn't see mentions of this previously in the topic.. So.. These are questions more than anything.
What happens if you die? let's say you hit the lottery, you take the lump sum, you have $200M after taxes. It hits your bank account. You decide to try that new-fangled heroin you've heard so much about.. Boom, dead. You've left everything to your only child. Will the child have to pay estate taxes on it, after you've already paid your taxes on it? I would think, yes.
If you took the annuity.. same situation as above. You got the first $10M payout, you've paid the taxes. Your heir would have to pay estate taxes on that, but.. First, would they inherit the remaining money? I'm thinking yes? And, if they did, at that point, they'd only have to pay their taxes on that money, not estate taxes, correct?
My opinion.. Annuity is the way to go, pending on a few things. First, every one of us sits here and says how we'll be smart with the money. Yeah, that's what every lottery winner in the past has said. Look how most of them end up. At least with the annuity, you have a chance of learning your lesson.. However.. Probably not because you'd probably be able to take out loans against the annuity.. So.. Huh.. Yeah.. Don't know.
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