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This question has been asked at least a million times: Lump sum or annuities?

From what I understand, the reason most people go with the lump sum is that they can invest the money  and make more, right?

Okay, but in a post-Madoff, widespread fraud world is that still the wisest choice? I'm just wondering.

Lump sum, aka cash option. Yes, investment and spending.

Nino224

Consider that some jackpot winners who take the annuity wind up turning around and selling the annuity to one of those compnaies that buy them, and only offer pennies on the dollar.

Someone here at LP has or had a signature,

"You can always buy a better annuity".

I believe a lot has to do with your age..If your young take annuities and if your old take a lump sum..Try to control yourself if your young which is hard to do but try...

I would take the cash option.

As much as people say that if your young you should take the annuity, I don't believe it's 100% safe due to on the Ohio Lottery website and I quote "Upon claiming the Mega Millions jackpot, the prize winner is given the option to receive the prize winnings in a single cash payment. The gross cash option will represent the sum of the first annuity installment plus the net proceeds from the sale of the government securities originally purchased to fund the annuity prize. Government securities are susceptible to financial market conditions; therefore the amount that is actually realized may vary from the amount originally invested, especially with the passage of time. As a result, the risk of loss rests with the prize winner."

 What sticks out to me is the,"the risk of loss rests with the prize winner."

" What sticks out to me is the,"the risk of loss rests with the prize winner.""

That part refers to the cash, not the annuity, and is connected to the part that says "The gross cash option will represent the sum of the first annuityinstallment plus the net proceeds from the sale of the governmentsecurities originally purchased to fund the annuity prize."

The risk they're talking about is that the value of the of the securities on the day of sale may be different than the original cost. That value can go up or down, based on interest rates and what buyers are willing to pay. Let's say that the amount of  cash for the jackpot is 54 million and they use 50 million to buy the securities (to pay another $96 milion in 24 future payments). When the winner chooses cash some time later the securities that originally cost 50 million will be sold, and that cash will be added to the 4 million, and paid to the winner. Now let's say that on the day the securities were bought interest rates were 5%, but on the day they're being sold interest rates have gone up to 6%. If I can invest 50 million in something that pays 6% I certainly wouldn't pay 50 million for something that pays 5%, so the securities being sold by the lottery will be worth something less than 50 million. OTOH, suppose interest rates have dropped to 4%. Wouldn't you rather invest in something that pays 5%? In that case the lottery securities would have increased in value and will sell for more than 50 milion. In real life interest rates dont normally change rapidly, and the value of the securites will be close to what was paid.

As with other securities, you can't possibly lose (or gain) money unless you sell. If you take the annuity the securities won't be sold, so there can't be a loss (or again). The annuity payments are  guaranteed; the state promises you that you'll get what you were told you'd get. The only way that won't happen is if the state and the government issuing the securities both default on their obligations.

"You can always buy a better annuity".

What's "better" is subject to an enormous amount of debate. The lottery isn't buying you a Yugo and paying enough money to buy a Rolls Royce. They're buying an investment that's extremely safe, but has a lower interest rate than some other investments.  Some people who think they can buy a better annuity could have taken the cash and then bought  an annuity from Madoff because he told them they'd make twice as much interest. Clearly that wouldn't be a better annuity. As a general rule, interest rates have an inverse relationship with risk. The only way to earn more interest is to take a bigger risk of losing money.

So, what's the better annuity that somebody is going to buy with the cash? They can buy one funded by the same government securities that the lottery can buy, but that's clearly not better. Maybe they'd  buy one funded by the investments of a private company. Is an annuity promising 6%  better than a 5% government backed annuity if the 6% is backed by AIG or GM? Basically, the government makes their choice  of balancing risk and reward, and you can choose another balance.

The other thing that almost everybody ignores is the taxes you'll pay when you take the cash. Let's take the example above, assuming the securities are sold for the same $50 million that was paid. With the annuity you get $4 million now and $50 million is invested. With the cash you get $54 million keep $35.1 million after taxes. Keep $2.6 million (as much as the guy with the annuity kept after taxes) and you can invest $32.5 million. Your investment is 65% of what's invested in the lottery's annuity. To earn the same amount of money you'll need to get 53.8% more interest. If you could get that without additional risk, don't you think the lottery would already be invested in that deal?

Finally, let's get back to the possibility that you won't get the annuity the lottery promised because the state and the government guaranteeing the securities have both defaulted on their obligations. What are the chances you'd have done better with your own investment, when the US government isn't paying their bills?  You thought of that and planned ahead by investing in gold? AIG isn't sending checks anymore and you've got no money, but a ton of gold. Who are you going to sell it to, and for how much? The other people in the US who aren't working and don't have money to spend aren't going to be buying much gold, so the value will go down. People in other countries? What are the chances of major economic collapse her that doesn't have a major impact elsewhere? Any investment you make is only as safe and stable as the society that makes any item valuable. If you're really worried about the value of a lottery annuity going down you should be investing in food with a really long shelf life, a means of keeping it safe, and some courses in farming and self sufficiency.

Lump sum without question. This stems from the fact that I have ZERO faith or trust in the government when it comes to handling money.

I'll gladly give half of the potential annuity value just for the peace of mind of knowing the government is not involved in it's disposition.

Madoff wasn't the first person to pull this sort of thing, it's just a variation of an old, scam. The Ponzi version of the scheme has been happening for a very, very long time he's just the most recent and currently well known example because of how much money he suckered out of people. You know why people got screwed by Madoff? They were suckers who were far to trusting and hands off with their money.

Take a current advertised jackpot (Mega Millions at 105M/67M for this example) and see what sort of percentage it would take for 67 million would be to turn into 105 million over the course of 25 years, you might want to subtract what your first payment would be, it'll roughly be the same every one one of the 26 of them. Then take that 67 million, deduct the taxes you'll pay one time for that lump sum (35% + State, if applicable) and for the sake of keeping it a little simple don't bother with potential deductions you might be able to find. Aside from taking some off the top to keep on hand, factor in how much every year you'll take out of the earnings to keep you living whatever lifestyle you've chosen for yourself. Having to have a return percentage that's 150% higher (might not even need to be that high but again might need to be a little higher) as the lottery annuity might seem big, but once you see just how low of a percentage return the annuity provides, it certainly won't seem that high.

Either way you're going to be in the top bracket but at least with the lump sum you won't be as much at the mercy of the government when it comes to taxes every year. The return on the annuity is extremely safe which is why it'll be terrible but shouldn't at all be hard to out perform even with half the capital of the initial lump sum amount with investments that can offer little risk. Also the more capital you start with the easier it will be to out perform the annuity, which won't even beat the rate of inflation. Not to mention having more freedom of being able to move your money into whatever you want to and not over the course of a quarter of a century. If the country goes broke tomorrow and the dollar isn't worth the paper it's printed on, you're going to be screwed either way. But at least with the lump sum it's something you might have been able to see coming and immediately avoid all together or at least limit the impact and not see whatever money you had left coming to you disappear and there being nothing you could do about it.

Just as many (or more) people have gone broke with the annuity as they have with the lump sum, probably more since there wasn't a lump sum option in most states until many years after they started their lotteries. In the end it'd be up to you, if you're going to go broke well, chances are you'd probably go broke either way.

I should have written this when I was a lot more alert and not sleep deprived.. I know I've missed somethings and there are more than likely big holes but oh well.

I came back to edit it and was a minute too late with clicking the submit button. I wanted to clarify and correct something I forgot to subtract the first payment from the annuity as well.