Welcome Guest
Log In | Register )
You last visited December 10, 2016, 5:39 am
All times shown are
Eastern Time (GMT-5:00)

a poll about annuities and lump sum

Topic closed. 58 replies. Last post 10 years ago by JackpotWanna.

Page 4 of 4
31
PrintE-mailLink

should annuities no longer be an option and lump sum an only choice?

yes lotteries should offer only lump sum [ 8 ]  [16.67%]
no the lotteries should offer annuities too [ 31 ]  [64.58%]
i'm cash only and of course annuities suck [ 3 ]  [6.25%]
not sure at this time [ 6 ]  [12.50%]
Total Valid Votes [ 48 ]  
Discarded Votes [ 2 ]  
Avatar
NY
United States
Member #23835
October 16, 2005
3475 Posts
Offline
Posted: October 4, 2006, 2:26 pm - IP Logged

Preppy, how about the effect of Income Taxes?  Let us take a specific example, a Mega Millions Jackpot with an annuity value of $26 million and a cash value of $14,820,000 in the state of California. 

 

The annuity comes out to 26 annual payments of $1,000,000.  The withholding tax situation is federal income tax of 25% ($250,000) is taken (no state tax on lottery winnings in California) so your check from the lottery every year is $750,000.  Keep in mind you will probably owe an additional $100,000 in federal income taxes as you most likely will be in the 35% tax bracket.  This gives you a net amount of $650,000 per year. 

 

Now let us take the cash value of $14,820,000.  Your check from the lottery would have 25% federal income tax withheld giving you $11,115,000.  You would also owe $1,482,200 in additional federal income tax at tax time.  This gives you a net total of $9,633,000.

 

So the question is could you find an investment with this amount of money that could return after taxes more then $650,000 per year for the next 26 years.  Let’s say a good to excellent financial advisor could average 10% per year, a healthy return mind you.  That would equal $963,300 per year.  Income taxes would be 35% at the federal level and 9.3% (ouch!) at the state level.  This means you would net out $536,558 per year.

 

This is where the professionals come in, as one would need to compute present value, future value, rate of return, income tax (both state and federal) on earned income, tax payment schedule, residual value, etc.  The question of annuity or lump sum is very complicated and requires the input of a seasoned financial planner and a qualified accountant.  I am neither a financial planner nor an accountant and welcome more dialogue on this topic, particularly if I have overlooked any pertinent issues.  I am somewhat inclined to choose an annuity.  It is my sincere wish that I am faced with this dilemma at some point in the (near) future!


If you won the lottery would you spend every penny of annual income every year? I don't know about you, but I'm planning on living for more than another 26 years, so I'm expecting to need an income 27 or 30 years down the road. Using your example I could take the cash, pay the taxes, and have an annual after-tax income of over 500 grand a year. Actually, I'd be getting close to 600 grand, because I wouldn't spend the rest of my life in a state that takes 9%. Even if I spent every penny of it, I'd still have an annual income of nearly 600 grand 30 years down the road, because I'd have had the principal that generates the income right from the start.

If you took the annuity because you thought it would give you a bigger after-tax income, what would you do with the income? You could spend perhaps 100 grand a year more than me, but then you'd never have any money in the bank, and when the payments stopped coming you'd be starring in a TV show about lottery winners whe became losers. You could spend about as much each year as me and invest perhaps 75 grand each year. After collecting your 26 payments you'd have invested a total of $1.95 million.  You'd have to do very well to turn that into  the same $9.6 million that I'd still have invested.

Of course this all assumes that tax rates don't change. Higher tax rates alone would afect us fairly equally, but suppose California decides to start taxing your annual payment? I suspect there's a good legal argument that your payments would be grandfathered, but I wouldn't count on it. Losing another 90 grand a year would reduce your annual income to less than mine.

I'm certainly not saying that taking the annuity is always a bad idea, but even if it gives you a little more average annual spending power, it also limits your options. If I ever have to make that decision I'll definitely be spending agood bit of time with people with far more expertise in these matters than what I have. FWIW, that's one of the reasons I figure that the people who go running to lottery headquarters to claim their prize a couple of days after winning are more likely to have problems down the road. Very few people have the knowledge to consider all of the factors that will affect their future finances.

    justxploring's avatar - villiarna
    Wandering Aimlessly
    United States
    Member #25360
    November 5, 2005
    4461 Posts
    Offline
    Posted: October 4, 2006, 2:40 pm - IP Logged

    "I'm certainly not saying that taking the annuity is always a bad idea, but even if it gives you a little more average annual spending power, it also limits your options. If I ever have to make that decision I'll definitely be spending agood bit of time with people with far more expertise in these matters than what I have. FWIW, that's one of the reasons I figure that the people who go running to lottery headquarters to claim their prize a couple of days after winning are more likely to have problems down the road. Very few people have the knowledge to consider all of the factors that will affect their future finances."  KY Floyd

     I Agree!    and the other reason is greed & being frivolous.  I saw an Aston Martin in a Naples showroom that had a sticker of $178,000 and I thought "What? it's only a car! You can't live in it!" But people buy them, so I guess it makes them feel good. Not my style.

      Avatar
      California
      United States
      Member #46824
      October 1, 2006
      270 Posts
      Offline
      Posted: October 4, 2006, 2:58 pm - IP Logged


      If you won the lottery would you spend every penny of annual income every year? I don't know about you, but I'm planning on living for more than another 26 years, so I'm expecting to need an income 27 or 30 years down the road. Using your example I could take the cash, pay the taxes, and have an annual after-tax income of over 500 grand a year. Actually, I'd be getting close to 600 grand, because I wouldn't spend the rest of my life in a state that takes 9%. Even if I spent every penny of it, I'd still have an annual income of nearly 600 grand 30 years down the road, because I'd have had the principal that generates the income right from the start.

      If you took the annuity because you thought it would give you a bigger after-tax income, what would you do with the income? You could spend perhaps 100 grand a year more than me, but then you'd never have any money in the bank, and when the payments stopped coming you'd be starring in a TV show about lottery winners whe became losers. You could spend about as much each year as me and invest perhaps 75 grand each year. After collecting your 26 payments you'd have invested a total of $1.95 million.  You'd have to do very well to turn that into  the same $9.6 million that I'd still have invested.

      Of course this all assumes that tax rates don't change. Higher tax rates alone would afect us fairly equally, but suppose California decides to start taxing your annual payment? I suspect there's a good legal argument that your payments would be grandfathered, but I wouldn't count on it. Losing another 90 grand a year would reduce your annual income to less than mine.

      I'm certainly not saying that taking the annuity is always a bad idea, but even if it gives you a little more average annual spending power, it also limits your options. If I ever have to make that decision I'll definitely be spending agood bit of time with people with far more expertise in these matters than what I have. FWIW, that's one of the reasons I figure that the people who go running to lottery headquarters to claim their prize a couple of days after winning are more likely to have problems down the road. Very few people have the knowledge to consider all of the factors that will affect their future finances.

      KY Floyd...as stated in your response, the best course of action is to get with people that have expertise in money matters, preferably those that are experienced in managing large sums of money.  Then you should be able to have all your options laid out in front of you and make your decision accordingly.  My feeling is that is much better to make an informed decision reviewing all of your options then say no matter the situation one should take the cash or the annuity.

      Regarding your comments that people claim their prize too quickly, I am in complete agreement.  It amazes me that you see winners come forward 1, 2 or 3 days after winning the jackpot.  Find it hard to believe that these people have thought through what lies ahead from a financial standpoint.  Maybe after one or two weeks, but a few days?  How about the guy who just won Mega Millions in Georgia.  He found out had the winning ticket Sunday morning, drove to the lottery office that day and claimed his ticket (cash option) on Monday morning.  Maybe, just maybe he had his financial plans mapped out ahead of winning, time will tell.

        Avatar
        NY
        United States
        Member #23835
        October 16, 2005
        3475 Posts
        Offline
        Posted: October 4, 2006, 3:11 pm - IP Logged

        KY Floyd...as stated in your response, the best course of action is to get with people that have expertise in money matters, preferably those that are experienced in managing large sums of money.  Then you should be able to have all your options laid out in front of you and make your decision accordingly.  My feeling is that is much better to make an informed decision reviewing all of your options then say no matter the situation one should take the cash or the annuity.

        Regarding your comments that people claim their prize too quickly, I am in complete agreement.  It amazes me that you see winners come forward 1, 2 or 3 days after winning the jackpot.  Find it hard to believe that these people have thought through what lies ahead from a financial standpoint.  Maybe after one or two weeks, but a few days?  How about the guy who just won Mega Millions in Georgia.  He found out had the winning ticket Sunday morning, drove to the lottery office that day and claimed his ticket (cash option) on Monday morning.  Maybe, just maybe he had his financial plans mapped out ahead of winning, time will tell.

        I'm guessing we haven't heard the last of the guy in Georgia.  One thing we can be pretty sure of, is that the phone company didn't change his number on a Sunday. At the very least, letting your name be published as a lottery winner before changing your phonenumber is a very follish thing to do.

          truecritic's avatar - PirateTreasure
          Michigan
          United States
          Member #22395
          September 24, 2005
          1583 Posts
          Offline
          Posted: October 4, 2006, 3:19 pm - IP Logged
          Posted 9/29/2006 4:12 PM ET 
          $4M buys New York man a Ferrari built for him
          Pininfarina scanned James Glickenhaus' body  to make the interior of his car fit him perfectly.
          By Michael Sawyer, AP
          Pininfarina scanned James Glickenhaus' body to make the interior of his car fit him perfectly.
          PARIS (AP)  James Glickenhaus wanted his
          latest car to make a profound statement.
          He also wanted it to be a reflection of
          himself, his passions and his desire for
          classic racing in the 1960s.
          The money manager who calls Rye, New
          York, home got that and more.
          It only cost him $4 million.
          Full story here:

            Avatar
            Delaware
            United States
            Member #30273
            January 14, 2006
            494 Posts
            Offline
            Posted: October 4, 2006, 6:03 pm - IP Logged

            Lotteries should offer both cash and annuity. Let the winner choose when they win. But, if both are offered, advertise both. Powerball does this on their website.

              Avatar
              Morrison, IL
              United States
              Member #4657
              May 13, 2004
              1884 Posts
              Offline
              Posted: October 4, 2006, 7:47 pm - IP Logged

              Mega Millions should advertise their jackpots' cash option values as well, although a few MM state lottery websites do, such as ohiolottery.com .

                justxploring's avatar - villiarna
                Wandering Aimlessly
                United States
                Member #25360
                November 5, 2005
                4461 Posts
                Offline
                Posted: October 4, 2006, 8:10 pm - IP Logged

                TrueCritic, that's a gorgeous car.  Wow. No doubt about it. But if someone gave it to me, I'd sell it to a multi-millionaire like Jay Leno who likes fancy sports cars and use the money for something a little more practical.

                I'm guessing there is no insurance coverage for this car either, right?  I don't know how that works, but I can't imagine getting anyone to insure this car. I might be wrong. Never had that kind of problem. 

                  Preppy's avatar - scene sunoverlake.jpg
                  Los Angeles County, CA
                  United States
                  Member #2161
                  August 24, 2003
                  30 Posts
                  Offline
                  Posted: October 5, 2006, 12:47 am - IP Logged

                  Annuities are great if you win while still realitively young.  But anyone over 55 may prefer the lump sum.  I am 34 and would want to get the most out of the money and my understanding is that the deferred tax savings on the annuity is like taking the lump sum at a guaranteed return of 8% interest, not to mention you can reinvest as the money comes in.  I also agree that it will help keep your money safe from moochers, because it is a built in excuse "i don't have access to most of the money".

                  I disagree. An annuity is the worse option for someone in their 30's.

                  What do you plan to do after the age of 60 or 64 when your annuity runs out? Most men and women live well into their 80's and 90's. So you would have at least 20 years of no annuity payments.

                  As a 34 year old lottery winner, did you or would you keep your real job/career and work as hard as you did before the lottery to guarantee promotions and salary increases or did you retire early and take that dream job that doesn't pay anything?

                  You have falsely assumed that US tax rates will remain stable for 26 to 30 years. Can you point to any point in American history when tax rates remained stable for 26 to 30 years?

                  Unfortunately, most people would overestimate their financial security by living pay check to pay check and most likely seeking out a financial advisor when it is too late.

                  From observation most of the people buying lottery tickets with the annuity option are senior citizens.

                    Avatar
                    Morrison, IL
                    United States
                    Member #4657
                    May 13, 2004
                    1884 Posts
                    Offline
                    Posted: October 5, 2006, 8:01 am - IP Logged

                    I agree with Preppy. It's better to take the lump sum and purchase your own annuity. That way, you get income for life instead of for just the 26 to 30 years.

                      Avatar
                      New Member
                      concord NH
                      United States
                      Member #47249
                      October 27, 2006
                      22 Posts
                      Offline
                      Posted: November 3, 2006, 3:13 am - IP Logged

                      Diff/the lump sum...I think anyone who wins over 20 million dollars should take a few business courses or even get a business degree and instead of giving alot of money away to charity, start up a business and hire people in your communtity...You never hear people who win big say that they want to get a business going and do some hiring...That is what should be done with a ton of money....Put a 1/4 of it away to live off for the rest of your life and if you are well below retiring age, do society a favor and put the money to work(not for yourself but your communtiy)...


                      Leave your family a business to run when you pass and not a ton of money...

                        Avatar
                        colonia, nj
                        United States
                        Member #46088
                        September 3, 2006
                        48 Posts
                        Offline
                        Posted: November 6, 2006, 6:27 pm - IP Logged

                        Cash lump sum is better; you can take your own annuity or invest it.  same as social security. If you take at 62, say get $1500.00 month  vs. 65, that's 52,000 in hand more than waiing until 65 with an increase.  Life is not written in stone; every day get more precious.  Of course if you have a geat job, then not good.  And who knows how long you will make around the bend.  Who says you wil be around in so many years, and if it is not transferrable to a bene, tough.    Show me the money.

                          Pick3forSC's avatar - Lottery-017.jpg
                          North Carolina (West of Charlotte)
                          United States
                          Member #1436
                          April 28, 2003
                          628 Posts
                          Offline
                          Posted: November 6, 2006, 7:25 pm - IP Logged

                          I'm not guaranteed to even wake up tomorrow let alone a yr. later waiting for my next annuity check.  No way Jos'e give me my money while i'm here & let me enjoy it. Uncle Sam is going to get his no matter which option you take. With the amount of money that is spent on people trying to win, for the people who do i'd be willing to say they feel the same way.  Show me the money!!!

                            JackpotWanna's avatar - squiz

                            United States
                            Member #4121
                            March 23, 2004
                            817 Posts
                            Offline
                            Posted: November 6, 2006, 8:30 pm - IP Logged

                            I got to go with annuities if I win the big one.  You know the saying, if you can't handle small money, how can you handle the big one.  26 payments will be fine for me.