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Lump Sum or Annual Payments?

Topic closed. 18 replies. Last post 10 years ago by CalifDude.

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Poway CA (San Diego County)
United States
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January 25, 2004
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Posted: July 19, 2004, 8:37 am - IP Logged

I promised I would work this up again, so here it is:


I believe that the lump sum payment for a large Lotto win is better than the annual payments. Here is an example for California. The lump sum is a little less than one-half of the announced Jackpot. Using the $7 million example that California uses on their web site, I will make the comparison.

If you won $7 million or your portion was $7 million, you would get approximately $3.3 million lump sum before taxes. After taxes (using the 2003 tax rates), you would keep $2,169,793.50.

Now for my illustration I will use the information for California. The annual payments are over 26 years and the first payment is $175,000 before taxes. After taxes you would receive $129,679. Now, that is a lot of money to most of us, but for those of us that live in California, that would not even come close to paying off our house. Houses in my neighborhood are selling for $450,000 and up for small (1200 sq. ft.) 2 bath, 3-bedroom house on a small lot. I bought my house for $26,500 in 1974 and it is now worth nearly $500,000. If I were to win the lottery, I would want to get out of debt. A check from the Lotto for $129,679 would not pay off all my bills. So, I have to keep working. I also dont want to keep working if I hit the big one!! So, so far I dont like the annual payments at all! The next year, the check would be $189,000 before taxes, and it keeps going up one-tenth of a percent every year after that. After 26 years, you have received the $7 million and the checks STOP!

How about lump sum (my favorite!)? You would receive one check for $2,169,793.50. If I owed $500,000 on my house and $20,000 on credit cards and $35,000 on my nice car, I could pay all of that off (and quit work!!!) and have $1,634,773.50 left to invest. If I invest that in municipal bonds, all the interest I earn is tax FREE!! This is what all the wealthy people do. You have already paid tax on it, why pay tax again? I dont know what the going rate for muni bonds are, but you will find that the percentage is less than other investments, but when you consider the tax FREE aspect&they often are very competitive. If I can get 4%, that is over $65,000 per year for me (just taking the interest), TAX FREE. Even us Californians can live on $65,000 per year tax free with all of our major bills paid off. And, the beautiful thing about this is that the money never ever runs out!! Not at that rate, anyway.

So, you make up your own mind, but lump sum is the way I want to take my winnings!!

 

    MetroPlex's avatar - 619631
    Richmond, VA
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    July 1, 2004
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    Posted: July 19, 2004, 12:38 pm - IP Logged

    I would take take the lump sum. Only a fool who didn't need the money might take payments.

    MP

    Putting The Damage On.

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      Poway CA (San Diego County)
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      Posted: July 20, 2004, 6:56 pm - IP Logged

      I forgot to mention that when I figured the tax I used the tax rate for Married filing jointly.

        dphillips's avatar - littleuns
        Albuquerque, New Mexico
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        Posted: July 20, 2004, 8:50 pm - IP Logged

        I agree with the lump-sum payment.  Of course, I'm single with no children, and believe me, I'll never marry if I hit the lottery just for some tax relief! 

        dphillips (Blue)

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          Dublin, GA
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          Posted: July 21, 2004, 2:23 am - IP Logged

          Unless I hit a - HUGE - jackpot all by myself I would take the payments.  You would end up with more money in the long run that way and you're set for life.  For me to take a lump sum the lump sum would have to come to $25 Million or greater after the deduction for the lump sum was made AND after all the taxes were taken out. 

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            Posted: July 21, 2004, 4:30 am - IP Logged

            i would take the annuity,i dont care how much the lump sum is,i would still have more than what i started with,and it would be a good investment for a few dollars.i could lie and say i only won a certain amount and show the first annuity check,that way people wouldnt be bummin money from me.i say people should do what they think is best for them,some people who are older might want the lump sum,or younger people,to invest how they want. but i would rather have the annuity,that way if i loose it or someone steals it out of my account,i would have next years check,and then so,till the last one (26-20 years,i think). i would want to play a little too. or you could take half now,if they would let you,and the other part in annuity. but i say decide after you win,see how much you win.


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              Posted: July 21, 2004, 10:18 am - IP Logged

              I root only for people who would take the lump sum.

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                Poway CA (San Diego County)
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                Posted: July 21, 2004, 10:32 am - IP Logged

                Ledhhed22 and phantomrainbow, maybe in your state(s) you can decide after you win, but in California we have to mark it on the play slip and it can not be changed (it has been tried in court and lost).  Ledhed22 you said you are set for life...maybe but the checks STOP in 26 years.  If you read books written by people that hit the lottery, you will see some of the problems they have had and why so many of them are broke!  For one thing, most of us are not used to budgetting ONE paycheck per year.  That is how it is done and very few people can budget for 12 months out of ONE paycheck.  You may be the exception and I don't want to agrue about this, just discuss it!!

                You do NOT get more money in the long run with either method unless you can't find some investment for the lump sum that will return enough (after you have gotten completely out of debt!!) to live on.  Ledhed22, you must have a lot of bills for you to say that the lump sum would have to be $25 million.  My example only used $3.3 million and it would be more than enough for me. 

                Now phantomrainbow is in a different boat!! He/she could live one whole year after someone stole the money and just wait for the next check to come.  Well, I couldn't do that!  Again, in California we can not split it between lump sum and annunity.  I think they are going to try to do a major overhaul of the California Lottery, so maybe they will change that. 

                So all of this boils down to the fact that we all have different ideas on how we can spend/save the money we would receive.  I want mine to last forever and give it to my kids and others want to just enjoy it while they can.  That's what makes the world go around...we are all different. 

                I hope we all have the problem of how to take the money real soon!!!

                  Lottery_Analyst's avatar - Batman
                  Georgia
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                  Posted: July 21, 2004, 1:38 pm - IP Logged

                  I believe in most cases that Lump sum is better, but it will truly depend on your own, personal financial situation.  The answer could be totally different between two people.  Let's say for example that two people each win $10 Million dollars.  One person is 19 and the other is 49.  I would recommend to the 19 year old to take the payment option and for the 49 year old to select the Lump Sum option.

                  Most 19 year olds do not yet know how to manage their finances properly, so they would possibly have $5 million in the bank when they are 19, and could be filing Bankruptcy by the time they are 25.  LOL

                  My best advice, check with a financial advisor or CPA after you win. 

                  When I win I am taking Lump sum though. ;-)

                  Thanks,

                  John

                    whodeani's avatar - lightening

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                    Posted: July 21, 2004, 2:23 pm - IP Logged

                    I would take the lump sum regardless, and I would strongly suggest that if ones wins a huge jackpot ($150 million+) , the lump sum should be taken. If you take the payments and you would happen to pass away during that time, estate taxes become due immediately on any remaining payments that are still to be paid to your estate. That could be millions upon millions of dollars that would have to be paid that you may not have lying around.

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                      Poway CA (San Diego County)
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                      Posted: July 21, 2004, 6:47 pm - IP Logged
                      Quote: Originally posted by Lottery_Analyst on July 21, 2004



                      I believe in most cases that Lump sum is better, but it will truly depend on your own, personal financial situation.  The answer could be totally different between two people.  Let's say for example that two people each win $10 Million dollars.  One person is 19 and the other is 49.  I would recommend to the 19 year old to take the payment option and for the 49 year old to select the Lump Sum option.

                      Most 19 year olds do not yet know how to manage their finances properly, so they would possibly have $5 million in the bank when they are 19, and could be filing Bankruptcy by the time they are 25.  LOL

                      My best advice, check with a financial advisor or CPA after you win. 

                      When I win I am taking Lump sum though. ;-)

                      Thanks,

                      John





                      John, I think you have it turned around, if anything.  You say that the 19 year old can't manage money, so they should take the payments.  So, you think that they can handle one large check ONCE each year?  What happens after 20 or 26 years when the payments stop?  You also (wisely) advise to use a financial advisor.  So, why not have the 19 year old use the advisor and get the lump sum so the money will be there for his/her children? 

                      Like others that have posted here, I really don't see any situation that would make taking the payments a better option than lump sum.  But, again, that is just my opinion.  20 years sounds like a long time, but that is only 20 paychecks!


                       

                        Fwup's avatar - babylaugh 086.gif

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                        Posted: July 21, 2004, 7:12 pm - IP Logged

                        CalifDude,



                        You're assuming that a person who won the lottery has two choices, 1. Take the lump sum and invest it, or 2. Take the annuity and spend every penny of it every year. I can think of at least two more options, 3. Take the lump sum and blow most of it on crackpot investments, or 4. Take the annuity, and each year spend some, invest some, and save some. You'd be suprised at how many people choose the third option. I think it's a little over 80%. On the other hand, if you choose the 4th option, you'd be able to live comfortably off of your savings and investments when the checks stopped coming.



                        "If I were to win the lottery, I would want to get out of debt. A check from the Lotto for $129,679 would not pay off all my bills. So, I have to keep working." No, you wouldn't. Quit your job, then use the lottery money to keep making payments on your bills.



                        "If I can get 4%, that is over $65,000 per year for me (just taking the interest), TAX FREE. Even us Californians can live on $65,000 per year tax free with all of our major bills paid off." Or you can live off $129,679 a year without your major bills paid off, at least for a few years. During those few years pay off your bills, then live off of $129,679 with your bills paid for the next 20 years or so.



                        "For one thing, most of us are not used to budgetting ONE paycheck per year. That is how it is done and very few people can budget for 12 months out of ONE paycheck." People who would have a problem budgeting one paycheck per year would probably have a problem budgeting one paycheck per life. That's what would happen if you took the lump sum.



                        Also, different people have different situations. My main concern wouldn't be trying to wring every penny from my winnings. My main concern would be living comfortably the rest of my life. If I won the Powerball today, I would be 70 years old when the payments stopped. To be honest, I don't expect to live that long. But if I did, I would probably be living a pretty simple life. I think I could manage pretty well if I was careful with my annuity payments.

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                          pensacola fl
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                          Posted: July 21, 2004, 7:42 pm - IP Logged

                           

                           

                            annuity all  the  way!

                          hi you


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                            Posted: July 21, 2004, 7:52 pm - IP Logged

                            Choose CASH or don't play!

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                              Poway CA (San Diego County)
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                              Posted: July 22, 2004, 9:13 am - IP Logged

                              Fwup, I agree that there are other ways than just the 2 I gave.  Yes, some people would be able to do those things you list, but when I worked in the financial industry, I found that people needed help!  I would not suggest that someone that took the lump sum would have only 1 paycheck per life!!!  That would be the wise person that would seek professional advice and invest the money and live off the interest.

                              You suggested that the person could take the annual payments and quit their job and live off the yearly payments.  Yes, that would probably work for the first 20 years!  You assume in most of your examples that the person is very wise in handling money and can invest some of the money as they go along.  Again, that is not what I saw when I worked in the industry.  But there are exceptions, and some people can handle large amounts of money and even handle one pay check per year, but it has been my experience that the percentage of people that can do that is very low.

                              I think that you are one of those people that can live within your means even if you came into money.  And I don't think you have family to leave it to, so the annual payments would work for you.  I have become better over the years (I'm 60 now) handling money, but it took many years to learn my lessons!!  It is just my personal choice that I would want to pay off all my bills and quit my job, not quit my job and keep paying my bills!  It is just a matter of choice and mine is different than yours. 

                              I hope you and I can show each other how we handled our big wins, soon!