How do I determine the interest rate received on annual payments?

Reply #34

time*treat — Mon, 10 Mar 2008 04:56:03 GMT

The question of risk pricing is not something we can all put the same numbers on. That's not return ON capital, that's return OF capital. The guys at LTCM couldn't survive getting it wrong even once, and they are nobel prize winners. If there is little risk, there is little reward. If there is opportunity for large gains, there must be (on the other side of the trade) a chance of taking a large loss. When you sell your winning stock at the top , someone somewhere just bought ... at the top. And... [ More ]

Reply #33

Mike Frazier — Mon, 10 Mar 2008 04:40:33 GMT

You're welcome.

As I think has been pointed out, you still have to pay taxes on that 4.7%, so you're going to lose at least a third of that. Figure on 3.1%, with state taxes (if any) subtracting still more.

I think you can get more than this by investing in municipal bonds, which are tax-free and quite secure.

Tell you what, if you win, I volunteer to manage your money for you, keeping 25% of whatever I can get you above what the lottery would pay, taking taxes into account. I think I... [ More ]

Reply #32

JAP69 — Sun, 09 Mar 2008 15:33:27 GMT

2. You will be earning that 4.66% interest on the 35 to 42% that you would lose to taxes if you choose the lump sum. To earn 346k on the $3.445 million you'd have after paying federal taxes you'd need to earn 10% interest.

And that is not counting the principal being spent from the zitgo to upgrade your lifestyle taking cash option.

Would not take much to go thru a half mil or better.

Reply #31

bashley572 — Sun, 09 Mar 2008 14:57:00 GMT

I agree with Mike, as the main issue in my opinion is

What is a BETTER rate of return - Cash or annuity?

But one issue that everyone is failing to take into account is RISK. As everyone has a different risk tolerance everyone's return on the cash option would be different. But if you take the annuity it is the same.

For example I have a realative that had over 100k in her credit union and would ONLY put the money in 3 month cd's !! best she could earn was about 2-4% at a time. Then she... [ More ]

Reply #30

JWBlue — Sun, 09 Mar 2008 14:20:41 GMT

Thanks for taking the time to do that.

For people that are conservative, that 4.7% isn't a bad deal. I would actually consider taking it

Reply #29

Mike Frazier — Sun, 09 Mar 2008 07:01:04 GMT

I don't have a spreadsheet at work (where I do most of my LP interaction), or I would have played with the formula I posted yesterday and given you an estimate.

However, tonight I tried just using the Windows calculator and it wasn't so hard.

Based on 27 payments, the interest rate falls between 4.7 and 4.8 percent. Not a good return on your investment, imho. Take the cash.

Reply #28

Coin Toss — Sun, 09 Mar 2008 04:30:36 GMT

JWBlue

I did say just my $.02 and YMMV (your mileage may vary).

Every other thread you linked to would have an effect on someone's life if they hit a jackpot, especially the one about leaving your spouse. However, not one of them got into specific interest payments on a jackpot that has not been hit.

In one of his books Mario Puzo (The Godfather author) tells of being in an Army hospital in WW II and one of the guys in the ward- a ward for head wounds- convincing himself he had a millio... [ More ]

Reply #27

KY Floyd — Sun, 09 Mar 2008 04:18:24 GMT

Yes, it's accounted for. When you pay off a loan you pay interest and principal (unless you've been suckered into a really bad deal where you just pay interest for a few years and still owe as much as when you started). In the example, the lottery would have just under $5 million that they're effectively borrowing from you, since you didn't take the cash. That money would be invested at just under 5%, so it would earn about 250k over the next year, at which time they would pay you 346k. Since th... [ More ]

Reply #26

Stack47 — Sun, 09 Mar 2008 02:02:03 GMT

They are all topics of discussion and we can decide as individuals which topics are trivial and redundant or worth reading and responding to. How many responses each topic gets might depend on interest or the number of sub-topics started. Three of the topics you mentioned are things the average lottery player could experience and three are things only less than .0000002% of players experience.

Forgive me for bringing up a topic that would actually have a financial impact on someone's life if... [ More ]

Reply #25

ThatScaryChick — Sat, 08 Mar 2008 23:29:56 GMT

There is no need to apologize JWBlue. Topics like these keep the forum active and some of us actually get to learn something new from them.

Reply #24

JWBlue — Sat, 08 Mar 2008 23:18:38 GMT

Yea...as if these topics aren't trivial.

> I wonder what the $275 mega millions winner is doing now.

> When you win a small prize, Do you spend the entire amount on more tickets, or do you stick to your budget for the night

> Would you leave your wife/husband?

> 5 + 0 out of 5 + 1 What do you say? Would hitting 5 + 0, coming that close, eventually drive you crazy?

> Giving away a winning ticket Would you consider giving a winning ticket as a tip or to a person down on luck... [ More ]

Reply #23

mjwinsmith — Sat, 08 Mar 2008 23:09:42 GMT

It makes no difference, Lump Sum or Annuity Option, there is an interest rate asssumption that goes into play.

For the Lump Sum you have to have an interest rate to compute the Present Value of the income stream, that is to say instead of getting the payments over time (26 years) what is it worth TODAY.

The interest rate would be tied to something like 10 year treasury notes or bonds or perhaps the Prime Rate of interest in effect today. Bet on something in the 3 to 5% interest range.

T... [ More ]

Reply #22

justxploring — Sat, 08 Mar 2008 23:01:51 GMT

I agree with Coin Toss. If I were interested in figuring out all of the possibilities, I would spend my time on a winning system, not trying to figure out how much interest I'm going to make. At least with the game itself, there is a constant...and it's fun. 5 years ago just about everyone would say to buy as much FL real estate as you can and flip it every 2 years. I remember when I was making 18% a year in a money market account in 1980 (although mortgage rates were almost as high.) I suppose... [ More ]

Reply #21

Coin Toss — Sat, 08 Mar 2008 22:56:38 GMT

True - many moons ago I questioned why the Mystical forum had ten times the traffic of the Mathemnatical forum, but I didn't strip the dream requests out of Mystical when I asked.

But, what is rational about dirving ourselves nuts over jackpots that haven't been hit?

How would you spend it, and would you try to remain anonymous are one thing, agonizing over percentages on a make believe are another.

Just my $.02

YMMV

Reply #20

time*treat — Sat, 08 Mar 2008 22:49:35 GMT

'cause if we stuck to rational and concrete topics, all the forums would be about as active as the mathematics forum.

Reply #19

Coin Toss — Sat, 08 Mar 2008 22:44:33 GMT

No offense towards anyone, but why all these threads and anguish over jackpots that haven't been hit!

Once upon a time, a lotto player climbed the Himalayas to query the guru, and once at the top, asked about interest rates and investments.

The guru asked the player, So how much was the jackpot you hit?

The player said they hadn't hit one yet.

The guru said, Come back and ask if and when you do .

Reply #18

justxploring — Sat, 08 Mar 2008 22:11:40 GMT

I agree with time*treat, which is why I said in my earlier post that figuring all of this out won't apply in the real world.

However, I do want to comment on the 25% you mentioned. The states are required to deduct 25% Federal Tax. That does not mean you won't owe more. You would definitely be in a much higher tax bracket. Look at the IRS tax tables for specifics. You would probably also be required to file an estimated tax before you invest all the money so you have the additional amount ow... [ More ]

Reply #17

time*treat — Sat, 08 Mar 2008 22:05:32 GMT

Which ever way you take the payment (lump sum or annuity), you would pay income taxes on it, plus any further income generated by investments* made from it. Future tax rates are unknown and unknowable.

If you take the 5.3 mil, you're going to pay income tax on that. If you invest what's left, you will pay taxes on any profits taken, at the tax rates in the year in which you took profits.

If you take the annuity, you're going to pay income tax on it - every year you get a check - at whateve... [ More ]

Reply #16

JWBlue — Sat, 08 Mar 2008 19:35:52 GMT

KY,

This is becoming more complicated by the minute.

Did your math factor in that part of the yearly payments would be coming out of the lump sum (the yearly payments won't be all interest, the intial lump sum amount of $5.3 million would be $0 at the end of the 26 years).

The amount of interest earned will be $3,700,000 ($9,000,000-$5,300,000). That might be a way to determine the number I am looking for. ( I don't know how though.

Reply #15

JWBlue — Sat, 08 Mar 2008 19:02:00 GMT

*** It is my understanding that when taking the lump sum, jackpot winnings are taxed at a 25% rate with no state tax (in California). I am not sure how that changes the math.

The end result I was looking for was determing what rate I would have to earn to match the rate that they were getting on their annuity. You state 10%. Getting a 10% return would seem to involve a lot of risk. It seems taking the annual payments is better which contradicts my initial thoughts and the thougths of most pe... [ More ]

Reply #14

KY Floyd — Sat, 08 Mar 2008 16:34:32 GMT

It works exactly like any other loan. They owe you 5.3 million now, but they pay it to you in annual installments of $346,154 totalling $9 million. After the first payment they still owe you about $5 million. A rate of 4.66% compounded monthly would repay the remainder in annual installments of $346,310, which is close enough. A payment that increases each year definitely complicates the math. They already know the interest rate and do a simple amortization table. Working backwards to figure out... [ More ]

Reply #13

time*treat — Sat, 08 Mar 2008 16:13:59 GMT

It's mainly a matter of deciding which number you want constant.

If you hold the interest rate constant, the nominal payout amount changes.

If you hold the nominal payout amount constant, then the interest rate is changing.

Reply #12

JWBlue — Sat, 08 Mar 2008 16:07:15 GMT

I thought it was going to be basic, but determined it would be complex considering money is being paid out in the annual installments. What complicates things further is the payment percentage usually changes every year.

Reply #11

Mike Frazier — Sat, 08 Mar 2008 07:25:09 GMT

The formula which shows the basic relationship is not hard to find; but solving for the interest rate ... that's another matter.

I love problems of this kind; but in this case the math is way beyond me.

Accountants interpolate from a table to solve this problem, and you can set up a spreadsheet with an incremental series of values and interpolate to get an approximation.

(1) PV = A * (((1 - ((1 + i)^(-n))) / i)

where PV = present value of the annuity, A = amount of payment, i = inter... [ More ]

Reply #10

justxploring — Sat, 08 Mar 2008 05:31:12 GMT

Which is why I said Investing in stocks, commodities, real estate, etc. and didn't get specific. I knew you'd write that

Reply #9

time*treat — Sat, 08 Mar 2008 04:22:22 GMT

Hey! That's my line.

Reply #8

dvdiva — Sat, 08 Mar 2008 04:20:38 GMT

Judging from the performance of the dollar you would be insane to choose the annuity a lottery offers now. Far better to choose a fund that has global diversity along with some gold or other comodities.

Reply #7

time*treat — Sat, 08 Mar 2008 01:36:25 GMT

if you want all the grimy details: http://en.wikipedia.org/wiki/Compound_interest

if you just want to get some work done: http://moneychimp.com/calculator/discount_rate_calculator.htm

Reply #6

justxploring — Sat, 08 Mar 2008 01:21:07 GMT

I obviously misunderstood the question. I guess I didn't even consider it since nobody would invest the entire lump sum in an interest bearing account. What would be the point? Usually someone wants to enjoy at least a portion of his/her prize. I'm guessing most people would purchase a nicer home (and probably a vacation home too) and buy a couple of new cars. So, although it's not hard to figure the interest over 26 years, it's not what would happen in the real world.

Reply #5

JWBlue — Sat, 08 Mar 2008 01:12:09 GMT

Yes that is what I am looking for. Where can I find the equation

Reply #4

time*treat — Sat, 08 Mar 2008 00:37:25 GMT

If you wanted to start with 5.3 mil and end up with 9 mil after 26 years, you'd need to earn about 2% per year, compounded.

You can find the relevant equations on the web.

Reply #3

Coin Toss — Sat, 08 Mar 2008 00:14:32 GMT

I think he's asking for the difference between the annuity and the cash option, if he was to get interest on both amounts from the get go, and then compare them.

Since the annuity amount does not exaist as a lump sum, I don't think there can be an answer.

Reply #2

justxploring — Fri, 07 Mar 2008 23:40:41 GMT

Depends what you mean. If you take $9M and divide by 26 you get about $346K a year. So the rate on $9M each year would be is 3.85% since 9,000,000 x 3.85% = $346,500

If you took the lump sum, your interest rate would vary depending on your investments. Averaging 6% a year for 12 years doubles your money. Investing in stocks, commodities, real estate, etc. should increase that amount substantially, but there is always some risk.

Reply #1

JWBlue — Fri, 07 Mar 2008 23:29:07 GMT

(bump). Does anyone have any insight on this? The quesion might need clarrification.

If the annual payments total $9 million over 26 years and the lump sum is $5.3 million, how do I determine the interest rate received if I take the annjual payments.

How do I determine the interest rate received on annual payments?

JWBlue — Tue, 04 Mar 2008 21:13:30 GMT

If the annual payments total $9 million over 26 years and the lump sum is $5.3 million, how do I determine the interest rate received