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One more annuity vs cash discussion

Topic closed. 20 replies. Last post 10 years ago by SirMetro.

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NY
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October 16, 2005
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Posted: January 16, 2007, 3:21 pm - IP Logged

One thing I haven't seen mentioned in these discussions, (or I missed), is any mention of someone taking a cash option not having the same"buying power",  let's say, of what the annuity offered. 

In other words, let's say the deal is a $100,000,000 annuity spread over 20 or 26 years as compared to a cash option that is about 40% of that, pre-tax.

I've learned here on LP that the advertised jackpot amount (annuity) doesn't really exist in cash (and that's what the prize wouldl be, theorhetically, if a winner opts for the annuity). I've also seen people post "you can buy better annuity" (that, in fact, was someone's sig, I'm sorry I forget whose). 

The question is, could $46,000,000 pre-tax cash really buy an annuity equivalent to a $100,000,000 (pre-tax annuity?) That's a difference of $54,000,000, which definitely is nothing to sneeze at.

And considering the current news story on Whittaker, would he have been better off with an annuity, or would he have blown all that too, year by year or perhaps by credit and having all those checks spent before he got them?

If you've netted $25 million  from the lump sum and lived off of the interest for two years and I've only got  about $4 million (a rough approximation of the after-tax net from the first two years of an annuity) you could write a check about 6 times as big as I could. Of course I can always go to the bank and borrow against my future payments to write a bigger check. As a very rough figure, with current rates of about 6% I could potentially borrow about $32 million if I could make annual payments of $2 million. That could let me spend  33% more than you. Of course we'd both be in trouble because you wouldn't have any more savings and my annual income would all go to the bank.

As far as  buying a better annuity,  that's a good example of bigger not always being better. You might be able to find an annuity that pays a better rate than what the lottery got, but you won't get a bigger payment for the same period of time. There's just no way an annuity that costs $25 million canl pay as much as one that costs $40 million, and that's what you and the lottery would have to spend with your example. What you can do is buy an annuity that has the schedule you want. You could get one that will give you an annual payment until you die, which might be "better" than one that stops paying when you're 50, or you might get one that pays modestly for the first few years and then pays more after you've gotten better at handling larger sums of money. What an annuity can't do, whether it's bought by you with the after-tax net or by the lottery with the pre-tax lump sum, is prevent you from doing something stupid. If you spend all the money now or commit all of your future earnings to repaying a loan that you squandered, or settling lawsuits, you're in trouble.

That last bit is why I think Jack Whittaker would still be in trouble if he'd taken the annuity. As near as I can tell, the guy is just a huge magnet for trouble, and the only question is how much money he can lose in any given year. If he can lose 100% each year it doesn't matter how much he collects each year, he won't have anything  left. That said, I don't believe for a minute that he's actually managed to lose over $100 million in 4 years, especially because the bank paid fraudulent checks. The story he seems to be telling is that his bank paid 12 checks averaging $8 million each without  asking any questions. My bank calls about every 2nd or 3rd month to verify the $2500 to $3000 check for our credit card bill.

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    NY
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    Posted: January 16, 2007, 3:37 pm - IP Logged

    I've thought a lot about this kind of stuff.

    OK, let's just say for conversation there was lottery in the 1950's, and the jackpot was $5 million, which would have been a lot more money then than it is now. Let's also say someone hit, and took an annuity, and after taxes that  came out to $330,000 a year. They'd pretty much think they were set, but as they years went on that once "vast annual income" wouldn't even buy a house in some places. What sounded like a fortune the first year turns out to be a comfortable living, sure, but not the score it first was. 

    There are probably quite a few people here on this board that can tell you what people are paying for cars once bought houses.  

    As for the stock market, even the "pros" get clobbered and the market can take dramatic turns in just one day. Consider 9-11 and airline stocks. (Although, oddly, just prior to 9-11 there was an unusally huge amount of shorting of airline stocks going on!)

    Another thing I've wondered about is people who insist that if you give to a church or charity you give 10%, ok so far. Then some of them say 10% based on gross. When I hear that one I always use a lottery jackpot as an example- OK ace, you're going to give 10% of the gross. So the advertised jackpot was $20,000,000 and you pledge to give 10% Based on the $20,000,000, but whether it's annuity or cash, after taxes you're not in any way, shape, or form going to see $20,000,000. But you've pledge $2,000,000. 

    The point is, when that $20 million becomes a lot less, would they still kick in the $2 they pledged? I kind of doubt it.

    Discuss if you will

    Smile

    One thing that's certain is that there's only one person who would have taken lump sum in the 50's. Everybody else would have taken the annuity because the top tax rate ifrom 1951 through 1963 was 91% on taxable income over $400,000.  Still, even with  high tax rates $333,000 annually would have been an enormous amount of money, but if it only last for 15 years, how much they invested and how well they invested would have had a major influence on how their standard of living changed when the payments stopped. If they lived well, but not extravagantly and made reasonable investment decisions, they could still be doing very nicely today. Historically the stock market has done  very well, and is a safe investment despite  the occasional huge loss.  The most important thing is to invest for the long term and understand how much risk you can take.

    As far as tithing, if your gross income is enough that you'll lose 30% to taxes you'll still have more left after paying 10% of the gross than somebody who makes less and also pays10% of the gross. If you chose lump sum, the annuity value isn't your gross , and IMHO, anyone who would voluntarily pledge 10% or the pre-tax annuity value is either seriously dedicated to the cause or seriously confused. I'd guess that most people who tithe are true believers and would still tithe even after paying a higher percentage of the gross in taxes. Of course it's also likely that a lot of the true believers will discover that their belief isn't quite as strong as they once thought.

      Coin Toss's avatar - shape barbed.jpg
      Zeta Reticuli Star System
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      Posted: January 16, 2007, 5:18 pm - IP Logged

      KY Floyd

      "Of course it's also likely that a lot of the true believers will discover that their belief isn't quite as strong as they once thought."

      Excellent point Floyd! 

      Those who run the lotteries love it when players look for consistency in something that's designed not to have any.

      Lep

      There is one and only one 'proven' system, and that is to book the action. No matter the game, let the players pick their own losers.

        justxploring's avatar - villiarna
        Wandering Aimlessly
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        Posted: January 19, 2007, 3:07 am - IP Logged

        I'm trying to find a breakdown of the PB annuity for the current $205M jackpot. How is it calculated?  I think the annuity makes a lot of sense. However, I'd be receiving the higher payments in my 80s, so I like the MM payout which is 26 years and divided into equal payments.  I thought it was a big mistake when FL changed from 6/49 to 6/53 and also increased the payout from 20 to 30 years.

          SirMetro's avatar - center
          East of Atlanta
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          Posted: January 19, 2007, 8:47 am - IP Logged

          One thing I haven't seen mentioned in these discussions, (or I missed), is any mention of someone taking a cash option not having the same"buying power",  let's say, of what the annuity offered. 

          In other words, let's say the deal is a $100,000,000 annuity spread over 20 or 26 years as compared to a cash option that is about 40% of that, pre-tax.

          I've learned here on LP that the advertised jackpot amount (annuity) doesn't really exist in cash (and that's what the prize wouldl be, theorhetically, if a winner opts for the annuity). I've also seen people post "you can buy better annuity" (that, in fact, was someone's sig, I'm sorry I forget whose). 

          The question is, could $46,000,000 pre-tax cash really buy an annuity equivalent to a $100,000,000 (pre-tax annuity?) That's a difference of $54,000,000, which definitely is nothing to sneeze at.

          And considering the current news story on Whittaker, would he have been better off with an annuity, or would he have blown all that too, year by year or perhaps by credit and having all those checks spent before he got them?

          Hummm...where's CashOnly when ya need him???

          First, I think (and this is only my opinion as since I have not had time to do the calculations and probably will allow someone else to do that anyway) that an annuity payout is actually an incredible handicap to one's "buying power".

          Simple mathematics makes that clear. If you divide $100,000,000 over a  period of 30 years is roughly $3.3 million annually. After taxes, you would only end up with roughly $1.6 million spendable funds. Now, if you obtain a 30 year, $25 million loan at roughly 6% interest using the annuity payout as collateral, odds are, you couldn't even make the annual payment (roughly around $2.46 million). How, because Uncle Sam gets at least 28% up front (just under $1 million) leaving you with less then 2.3 million, which in turns leaves you in the hole for about $1 to $2 hundred thousand a year. And this doesn't even take into account state income tax.

          On the other hand, you take the cash payout of roughly $46 million (pretax) and (with appropriate guidance and/or knowledge) invest it smartly in a wide variety of investments, with as little as 5% return, you will double your money every so many years (and of course I will let someone else figure that out) far exceeding the initial $100 million value that any annuity could offer up and keep a good portion of it in tax shelters for decades to come. And the "buying power" of $46 million in the bank is worth $460 million, 4 times anything that you can "Hope" to get with an annuity payout.

          As for the Whittaker person, the annuity would probably not have helped him because most likely, he would have leveraged himself right out of it anyway. People such as him who have no idea how to manage money will never have money. It only serves to remind me of an old saying that if you were to take all the money from everybody in the world and equally distributed it amongst every living person. In 2 years, those who were insanely wealthy yesterday will be once again. And those who were desperately poor will be again.

          But hey, I regress and dearly hope and pray that one day, we will all have that oppurtunity to test out that "concept" of dealing with big money for real. Till then, take care and have fun folks.

          Sir Metro

            SirMetro's avatar - center
            East of Atlanta
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            Posted: January 19, 2007, 8:53 am - IP Logged

            I'm trying to find a breakdown of the PB annuity for the current $205M jackpot. How is it calculated?  I think the annuity makes a lot of sense. However, I'd be receiving the higher payments in my 80s, so I like the MM payout which is 26 years and divided into equal payments.  I thought it was a big mistake when FL changed from 6/49 to 6/53 and also increased the payout from 20 to 30 years.

            What you are looking for is kept here (at Todd's other site) http://www.usamega.com/powerball-jackpot.htm