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Financial analyst looks at lottery jackpot cash/annuity options

Topic closed. 18 replies. Last post 11 years ago by Pythagoras.

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New Mexico
United States
Member #12305
March 10, 2005
2984 Posts
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Posted: August 27, 2005, 7:28 am - IP Logged

    It seems as though no one really has a notion as to what the "proper" thing to do is; that's human nature. The best thing to do is what YOU think is best for you. However, you might want to consider getting professional help from a financial lawyer, and an accountant.    As to the question of "Lump Sum" or "Annuity",  I have not seen anyone address the "Tax" situation.  In most cases, if a lottery winning is taken as an annuity, the proceeds are generally considered "income", and with a good tax lawyer and some tax dodges you can figure on paying approximately 30%.  Taken as a "Lump Sum" however,  the proceeds are generally considered "Capital Gains" which CAN be taxed at a rate up to 78%.  Now, taking that "worst case" scenario, your 34.5 million dollars, suddenly becomes $7,625,000.  Now, if you foolishly went out and "binged", (et al) buying all your friends new cars, houses, sailing boats, etc., and you blew, say, 10 million, you woiuld find yourself in the predicament of having to come up with  $2,375,000.00 just to keep out of one of Uncle Sams nice Federal Prisons. Now what do you think all those "friends" are going to do when faced with the prospect of losing all those nice "gifts" you gave them?  They won't even remember who you are!  You will end up in worse shape than you started out, and with no friends to boot.  You may think this is all a "what if", but it really did happen.  The moral is: do what YOU think is best, but don't rely solely on your own judgement because it MAY not be as good as you think.                                                                                                                  MC

You make a valid point.  One of the most valid I've seen on the annuity/lump argument.  I'm not certain how the tax difference between earnings and capital gains works, but I definitely believe it's possible a person could make a lot of wrong choices and find he'd paid out so much more in taxes than anticipated that the annuity would have been a blessing.

Professional advice, shining spotlights into every corner where the rats and roaches might be is the only wise approach, you observe, and I agree.

Jack

Absorb the good, ignore the bad, weigh the ugly.

It's about number behavior.

Egos don't count.

 

Dedicated to the memory of Big Loooser

 

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    New Mexico
    United States
    Member #12305
    March 10, 2005
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    Posted: August 27, 2005, 7:42 am - IP Logged
    I'm just saying the annuity protects your money and gives a larger guaranteed income even if it's somewhat smaller than the "theoretical" maximum if you invested all the cash yourself.  I'm just saying that theoretical maximum will probably never be seen because you will have less cash to invest.  The "real world" maximum is probably the annuity and you know it's coming every year. 
    No, I don't work fo the lottery.  The lottery doesn't care what you do with your money, they don't make any money off whether you take the cash or invest take the annuity.  They make money by selling you the ticket in the first place.  But, they do hate to hear the "he was rich for two years but now works at McDonalds" stories.  Makes them look bad, like somehow it's their fault even though it's not. 
    This thread is actually in response to the guy who always screams that cash is the only sensible option, but it's not.  If I won, I might take the cash, I might not.
    Right now the jackpot for Mega is at $97 million.  Taking the annuity, that's $3 million per year AFTER taxes, for 26 years.  That's take home.  I could live on half that, invest the remainder each year (maybe in annuities, maybe in stocks....), but no matter what I would be guaranteed that $3 million per year for a long time.  Whereas the cash option after taxes is $47 million. How much of that am I going to spend and how much am I going to invest?  What if I lost a major portion in bad investments?  What if I spent more than I should?  Rather than having 3 million per year for 26 years -- guaranteed -- I might just end up with $5 or $6 million total and have to eke out an existance on that.  Sure that's more than most people have, but considering what I could have had if I'd been a little more prudent... 

    I agree with you that there's something a bit strange, almost sick, in the partisanship concerning how winners should handle their money.  All the drumbeats, table-pounding and opinions strong enough to pass for religion aren't a kind of behavior easily explained within my own mind.

    To be honest, if I were younger, if the occasion was right, I might take the annuity, if I didn't hold the certainty that these people can't be trusted.  I believe they're deliberately attempting to give a false impression about what winners get paid.

    On my blog is a picture of the NM recent winner.  He took the lump.  Got 50M and some change before the tax gouge.

    But on the powerball site there's a picture of him holding up a huge check that says 90 some million.

    At this stage of the game 90 some million isn't a factor, as we all know.

    I make my choices about my business dealings base on whatever I know about the people I'm dealing with.  I tend to become edgy having any dealings with people who don't speak straight from the shoulder, who want to give me information I have to examine carefully to find what's true in it.

    As for whether they care whether a person chooses the annuity, I suspect they do.  Otherwise they wouldn't push it as the best of all worlds.... as what a person's obviously going to choose.

    Money lying around being invested is power.  It's a commodity, a tool.  A lot can happen to it in 30 years, and when decisions are being made about how to invest it, where to invest it, there are almost certainly brokerage fees, side benefits, all manner of benefits to the people in a position to make the decisions.

    They might even use it as collateral in other matters, or erode it away in somewhat the way Social Security has been compromised over the years.

    Jack

    Absorb the good, ignore the bad, weigh the ugly.

    It's about number behavior.

    Egos don't count.

     

    Dedicated to the memory of Big Loooser

     

      rundown99's avatar - cigar

      United States
      Member #567
      August 14, 2002
      482 Posts
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      Posted: September 20, 2005, 11:33 am - IP Logged

          It seems as though no one really has a notion as to what the "proper" thing to do is; that's human nature. The best thing to do is what YOU think is best for you. However, you might want to consider getting professional help from a financial lawyer, and an accountant.    As to the question of "Lump Sum" or "Annuity",  I have not seen anyone address the "Tax" situation.  In most cases, if a lottery winning is taken as an annuity, the proceeds are generally considered "income", and with a good tax lawyer and some tax dodges you can figure on paying approximately 30%.  Taken as a "Lump Sum" however,  the proceeds are generally considered "Capital Gains" which CAN be taxed at a rate up to 78%.  Now, taking that "worst case" scenario, your 34.5 million dollars, suddenly becomes $7,625,000.  Now, if you foolishly went out and "binged", (et al) buying all your friends new cars, houses, sailing boats, etc., and you blew, say, 10 million, you woiuld find yourself in the predicament of having to come up with  $2,375,000.00 just to keep out of one of Uncle Sams nice Federal Prisons. Now what do you think all those "friends" are going to do when faced with the prospect of losing all those nice "gifts" you gave them?  They won't even remember who you are!  You will end up in worse shape than you started out, and with no friends to boot.  You may think this is all a "what if", but it really did happen.  The moral is: do what YOU think is best, but don't rely solely on your own judgement because it MAY not be as good as you think.                                                                                                                  MC

      But if you win the jackpot in a state where you can be anonymous, such as Delaware, Ohio (with the help of a trust), New Hampshire (Formation of a Trust is needed), or Louisiana (also with the help of a trust), you wouldn't need to worry what family or friends think because they wouldn't know anyway.  You would only do what YOU think is best, because society at large couldn't target you for something that no one knows that you have.

      Smart lottery winners form trust to claim their winnings.  They send an attorney to the lottery headquarters to claim the prize in trust, so that ONLY the name of the trust is revealed.  And they tell NO ONE, especially relatives.

      If you ever win a lottery and you are single, the only person you should ever marry is someone who was truly in love with you BEFORE you won the jackpot!

        Pythagoras's avatar - nw bookeep.jpg
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        East Coast, USA
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        September 15, 2004
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        Posted: September 20, 2005, 11:10 pm - IP Logged

        Well you-now, First things first. Remember, we've paying our money and winning other players money here. Therefore, old Uncle Sam (for us Old School Folks and the TAX MAN or G.I.R.L.S. for you new age readers) rules should always be considered first. If the winner of a large jackpot is smart, he, she, or they would take the money and run like hell. Why? No brianer...I don't want to pay any higher percentage in taxes on that money than I need to. Shorter tax liabilities is always better. I can invest the rounded millions myself and let it earn 12% interest while the lottery gurus' only gaurantee me 4.5 to 7.0 and the differents they keep. (Do you see my point?) Besides, with the annuity option selected, GOD forbid if you die before the annuity ends, your benificary has to pay the TAX on the unpaid portion remainding. So, I don't care what the attorneys and financial consultants say, My quote is " TAKE THE DAMM MONEY AND RUN".