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MegaMillions advertised annuity

Topic closed. 11 replies. Last post 10 years ago by KY Floyd.

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kjs703's avatar - batman08
Alexandria,VA
United States
Member #51062
March 26, 2007
367 Posts
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Posted: April 6, 2007, 3:00 pm - IP Logged

Could anyone share the pros and cons of taking the advertised annuity vs the lump sum amount?

    Bradly_60's avatar - disney37
    Atlantic Mine, Michigan
    United States
    Member #416
    June 23, 2002
    1614 Posts
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    Posted: April 7, 2007, 11:00 am - IP Logged

    One thing....TIME VALUE OF MONEY....money that you have now is worth more than some money that you can have in the future.  Always take the cash if you are looking to be a smart investor.

    B-rad

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      Posted: April 7, 2007, 11:31 am - IP Logged

      If you're young enough to potentially get all the annuity payments, and the yearly amount is enough that you would have more than enough money to spend and invest, why not annuity? Then you don't have to wory about losing it all in a few years. On pots over 10 MILL I take Annuity. The theory is that with cash option you can get your own Annuity But with that much money per year I'd be happy with it.

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        Charlotte
        United States
        Member #42106
        June 27, 2006
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        Posted: April 7, 2007, 1:14 pm - IP Logged

        Ladies, Gentlemen:

         Please see the copied spreadsheet below.  Should anyone be interested in obtaining the Excel Spreadsheet, I will be glad to pass it along.  It uses the following basic assumptions:

        Annuity Payout per year: $38,500 times the number of millions won

        Cash value at approximately 50% (PB is usually around 47-48%)

        Average investment rate of return: 8%

        Tax rate at 45% (includes 35% of federal, and roughly 10% for state, no deductions assumed as your income would be above the limitations for taking them!)

        and finally: Living expense: $500,000 per year, assuming that you have no debt.

        As an accountant, I realize that you can cut the numbers in many different ways.  However, this at least gives you some perspective in your decision.  Notice that I included only out 21 years, as I wanted to demonstrate, give the above assumptions, when your "net investments" (i.e. invested cash) would be equal if you had taken the annuity vs lump sum.  By the way, the spreadsheet goes out 30 years.

         

        Posting Winning Investment
               
          Portfolio Balance       28,875,000.00  
          
        Year1 Yearly Net Income*         837,760.00     2,425,500.00  
          
            Net Investment**       30,212,760.00     1,925,500.00  
            Portfolio Balance       30,212,760.00     1,925,500.00  
               154,040.00  
        Year2 Yearly Income*       2,417,020.80     4,196,540.00  
          
          Taxes***       (1,102,161.48)    (1,913,622.24) 
          
          Income, Net of Taxes, Exp         814,859.32     1,782,917.76  
          
            Net Investment**       31,027,619.32     3,708,417.76  
            Portfolio Balance       31,027,619.32     3,708,417.76  
               296,673.42  
        Year3 Yearly Income*       2,482,209.55     4,339,173.42  
          
          Taxes***       (1,131,887.55)    (1,978,663.08) 
          
          Income, Net of Taxes, Exp         850,321.99     1,860,510.34  
          
            Net Investment**       31,877,941.31     5,568,928.10  
            Portfolio Balance       31,877,941.31     5,568,928.10  
               445,514.25  
        Year4 Yearly Income*       2,550,235.30     4,488,014.25  
          
          Taxes***       (1,162,907.30)    (2,046,534.50) 
          
          Income, Net of Taxes, Exp         887,328.01     1,941,479.75  
          
            Net Investment**       32,765,269.31     7,510,407.85  
            Portfolio Balance       32,765,269.31     7,510,407.85  
               600,832.63  
        Year5 Yearly Income*       2,621,221.55     4,643,332.63  
          
          Taxes***       (1,195,277.02)    (2,117,359.68) 
          
          Income, Net of Taxes, Exp         925,944.52     2,025,972.95  
          
            Net Investment**       33,691,213.83     9,536,380.80  
            Portfolio Balance       33,691,213.83     9,536,380.80  
               762,910.46  
        Year6 Yearly Income*       2,695,297.11     4,805,410.46  
          
          Taxes***       (1,229,055.48)    (2,191,267.17) 
          
          Income, Net of Taxes, Exp         966,241.63     2,114,143.29  
          
            Net Investment**       34,657,455.46   11,650,524.09  
            Portfolio Balance       34,657,455.46   11,650,524.09  
               932,041.93  
        Year7 Yearly Income*       2,772,596.44     4,974,541.93  
          
          Taxes***       (1,264,303.98)    (2,268,391.12) 
          
          Income, Net of Taxes, Exp       1,008,292.46     2,206,150.81  
          
            Net Investment**       35,665,747.92   13,856,674.90  
            Portfolio Balance       35,665,747.92   13,856,674.90  
             1,108,533.99  
        Year8 Yearly Income*       2,853,259.83     5,151,033.99  
          
          Taxes***       (1,301,086.48)    (2,348,871.50) 
          
          Income, Net of Taxes, Exp       1,052,173.35     2,302,162.49  
          
            Net Investment**       36,717,921.27   16,158,837.39  
            Portfolio Balance       36,717,921.27   16,158,837.39  
             1,292,706.99  
        Year9 Yearly Income*       2,937,433.70     5,335,206.99  
          
          Taxes***       (1,339,469.77)    (2,432,854.39) 
          
          Income, Net of Taxes, Exp       1,097,963.93     2,402,352.60  
          
            Net Investment**       37,815,885.20   18,561,190.00  
            Portfolio Balance       37,815,885.20   18,561,190.00  
             1,484,895.20  
        Year10 Yearly Income*       3,025,270.82     5,527,395.20  
          
          Taxes***       (1,379,523.49)    (2,520,492.21) 
          
          Income, Net of Taxes, Exp       1,145,747.32     2,506,902.99  
          
            Net Investment**       38,961,632.53   21,068,092.99  
            Portfolio Balance       38,961,632.53   21,068,092.99  
             1,685,447.44  
        Year11 Yearly Income*       3,116,930.60     5,727,947.44  
          
          Taxes***       (1,421,320.35)    (2,611,944.03) 
          
          Income, Net of Taxes, Exp       1,195,610.25     2,616,003.41  
          
            Net Investment**       40,157,242.78   23,684,096.39  
            Portfolio Balance       40,157,242.78   23,684,096.39  
             1,894,727.71  
        Year12 Yearly Income*       3,212,579.42     5,937,227.71  
          
          Taxes***       (1,464,936.22)    (2,707,375.84) 
          
          Income, Net of Taxes, Exp       1,247,643.21     2,729,851.88  
          
            Net Investment**       41,404,885.98   26,413,948.27  
            Portfolio Balance       41,404,885.98   26,413,948.27  
             2,113,115.86  
        Year13 Yearly Income*       3,312,390.88     6,155,615.86  
          
          Taxes***       (1,510,450.24)    (2,806,960.83) 
          
          Income, Net of Taxes, Exp       1,301,940.64     2,848,655.03  
          
            Net Investment**       42,706,826.62   29,262,603.30  
            Portfolio Balance       42,706,826.62   29,262,603.30  
             2,341,008.26  
        Year14 Yearly Income*       3,416,546.13     6,383,508.26  
          
          Taxes***       (1,557,945.04)    (2,910,879.77) 
          
          Income, Net of Taxes, Exp       1,358,601.09     2,972,628.50  
          
            Net Investment**       44,065,427.71   32,235,231.79  
            Portfolio Balance       44,065,427.71   32,235,231.79  
             2,578,818.54  
        Year15 Yearly Income*       3,525,234.22     6,621,318.54  
          
          Taxes***       (1,607,506.80)    (3,019,321.26) 
          
          Income, Net of Taxes, Exp       1,417,727.41     3,101,997.29  
          
            Net Investment**       45,483,155.13   35,337,229.08  
            Portfolio Balance       45,483,155.13   35,337,229.08  
             2,826,978.33  
        Year16 Yearly Income*       3,638,652.41     6,869,478.33  
          
          Taxes***       (1,659,225.50)    (3,132,482.12) 
          
          Income, Net of Taxes, Exp       1,479,426.91     3,236,996.21  
          
            Net Investment**       46,962,582.04   38,574,225.29  
            Portfolio Balance       46,962,582.04   38,574,225.29  
             3,085,938.02  
        Year17 Yearly Income*       3,757,006.56     7,128,438.02  
          
          Taxes***       (1,713,194.99)    (3,250,567.74) 
          
          Income, Net of Taxes, Exp       1,543,811.57     3,377,870.28  
          
            Net Investment**       48,506,393.61   41,952,095.57  
            Portfolio Balance       48,506,393.61   41,952,095.57  
             3,356,167.65  
        Year18 Yearly Income*       3,880,511.49     7,398,667.65  
          
          Taxes***       (1,769,513.24)    (3,373,792.45) 
          
          Income, Net of Taxes, Exp       1,610,998.25     3,524,875.20  
          
            Net Investment**       50,117,391.86   45,476,970.77  
            Portfolio Balance       50,117,391.86   45,476,970.77  
             3,638,157.66  
        Year19 Yearly Income*       4,009,391.35     7,680,657.66  
          
          Taxes***       (1,828,282.46)    (3,502,379.89) 
          
          Income, Net of Taxes, Exp       1,681,108.89     3,678,277.77  
          
            Net Investment**       51,798,500.75   49,155,248.54  
            Portfolio Balance       51,798,500.75   49,155,248.54  
             3,932,419.88  
        Year20 Yearly Income*       4,143,880.06     7,974,919.88  
          
          Taxes***       (1,889,609.31)    (3,636,563.47) 
          
          Income, Net of Taxes, Exp       1,754,270.75     3,838,356.42  
          
            Net Investment**       53,552,771.51   52,993,604.96  
            Portfolio Balance       53,552,771.51   52,993,604.96  
             4,239,488.40  
        Year21 Yearly Income*       4,284,221.72     8,281,988.40  
          
          Taxes***       (1,953,605.10)    (3,776,586.71) 
          
          Income, Net of Taxes, Exp       1,830,616.62     4,005,401.69  
          
            Net Investment**       55,383,388.12   56,999,006.65  

         

        Good luck to everyone!

         

        _____________________________________________________________________

        Nothing beats a try, but a failure!

          kjs703's avatar - batman08
          Alexandria,VA
          United States
          Member #51062
          March 26, 2007
          367 Posts
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          Posted: April 9, 2007, 1:27 pm - IP Logged

          Counting Man:

          Thanks for the sharing the spreadsheet.If I understand correctly, (which is no guarantee since I do not have a financial background)The Lump Sum amount and the annuity payment amount will be roughly the same after twenty-one years.But does this not assume that an intelligent investor is behind the scenes ensuring an 8% return?  For example, if a person left the money in a savings account at roughly 3% interest – how could one ever get the 8% return being projected?  I do not know – maybe larger investors have better opportunities to earn higher interest rates.  But to achieve those rates would require more risks – meaning there would be a chance of money loss, instead of gain.  Money loss would mean that the overall balance could be below the annuity payments after 21 years.Granted, if I were to win – I would hire money managers to work their magic on my winnings and that may solve the issue that I see.Here is my take on the situation:1)      if advertised Jackpot under 30 Million – take Lump sum amount.2)      If advertised Jackpot over 30 million – take annuity payment for X years (I think 26 years) What am I missing?  A steady yearly payment seems a better option then hoping for a rate of return (which may or may not be attainable) given that one does not have the financial expertise to guarantee the return. ThanksKJ
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            NY
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            Member #23835
            October 16, 2005
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            Posted: April 9, 2007, 2:54 pm - IP Logged

            This subject has been nearly beaten to death, and you can find a lot of opinions on it by using the search feature.

            For starters, ignore anybody who offers a cookie cutter approach, whether it's to always take the cash, always take the annuity, take cash up to some amount and annuity over that, or anything else. It's a personal decision that should be the result of considering what you'd like to do with the money and what the financial realities are. What's a perfectly good decision for one person may not be the best for somebody else.

            If you don't want to deal with the hassles of investing and your life expectancy isn't much more than the payout period the annuity is probably a very good choice.  You'll get a predictable and guaranteed income every year, and there's a good chance the payments will continue until you die and it isn't your problem what happens after that.

            If you expect to live much beyond the payment period you will need to deal with some investment hassles regardless of which payment option you choose. If you choose the annuity you have to invest some of it every year or when the payments stop your income will drop to almost nothing

            One of the arguments for taking cash is that you can get the same  or better investment as the lottery, and there's certainly some truth to that.  The lottery invests the cash value and gets a guaranteed payment and you can do that, too. If you're willing to accept some risk you may well be able to earn a higher rate, but you could also lose everything. If interest rates rise, you may be able to take advantage of that if oyu aren't locked intot he current rtes for a long period. FWIW here's a blanket statement I don't think anyone should argue with: anyone who takes the cash and doesn't put a good chunk into a safe, guaranteed investment is just asking for a chance to be poor later on.

            IMHO, the biggest advantage of taking cash isn't the chance that you can do better than the annuity. It's the flexibility to use the money as you choose. Of course you can also borrow against the future income of the annuity. The biggest advantage of taking the annuity is that  you get to defer the taxes and earn interest on them until they are due. There's also a modest  benefit in getting to apply your annual deduction multiple times to the annual payments instead of ony getting one single deduction against the single lump sum payment. If you're married and file jointly everything under $350,000 will be taxed at less than the maximum rate. Over 26 years that means an extra $8.75 million will be taxed at lower rates.

            To keep it simple, let's look at a $26 million annuity for MM. If you take the annuity you'll get an annual income of $1 million for the next 26 years. I'll assume federal and state taxes total 40% less $30,000 from the portion that isn't taxed at the top rate. That would be $630,000 annually after taxes. If you take the cash you'd getabout $15.25 million, which would net about $9.15 million after taxes. Invested at a fairly safe 5.5% you'd have a pre-tax income of $503,000 and about $332,000 after taxes. The annuity could give you almost twice as much spending power each year, but if you actually spend it all you'll be broke when the payments stop. By investing the lump sum the annual income can continue forever (ignoring the possibility that estate taxes will take a big chunk of what your heirs eventually end up with). If you spent the same $332,000 available from the lump sum and invested the remaining $298,000 in a tax deferred investment at 5.5% you'd have about $17 million after 25 years.  $7.75 million would be from your annual investments and $9.25 million would be taxable interest. Even if you paid taxes at the regular income tax rate of 40% you'd have $13.3 million, or $4.14 million more than if you'd taken the cash up front.

            Obviously, what you spend, how you invest, and the tax implications (and there's no telling what might happen with taxes in the future) can result in major changes to the scenario I describe. With a difference of over $4 million between the two choices the money spent on good advice from a professional would be your best investment.

              OldSchoolPa's avatar - Lottery-057.jpg
              Gurnee, Illinois
              United States
              Member #49731
              February 12, 2007
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              Posted: April 9, 2007, 2:56 pm - IP Logged

              If you're young enough to potentially get all the annuity payments, and the yearly amount is enough that you would have more than enough money to spend and invest, why not annuity? Then you don't have to wory about losing it all in a few years. On pots over 10 MILL I take Annuity. The theory is that with cash option you can get your own Annuity But with that much money per year I'd be happy with it.

              Always, Always, Always take the cash value settlement option. 

              If you're young enough and sensible, take the cash value option.  What I mean by sensible is having the sense to spend no more than 10 percent of your net winnings each year.  Even people who have taken the annuity option have run into financial trouble when they spent the next year's check the previous year.  Taking the annuity therefore is not a guaranteed way to protect one from making dumb decisions.  Also, if you happen to die early into the annuity payment schedule, Uncle Sam will want his taxes on the entire remaining annuity payment amounts (I don't know if the provision to spread out the tax bite over a period of years has been enacted), so the annuity will be a headache for beneficiaries.

              On pots over 10 MILL I take Annuity...exactly how many jackpots have you won?  Or are you speaking in a hypothetical sense?

              On pots over 10 MILL I take Annuity. The theory is that with cash option you can get your own Annuity  This made no sense at all and doesn't even qualify as a theory; just a preference and an option.  Those who take the cash value option don't necessarily have to nor should they in all instances buy an annuity.  Everyone has different circumstances and there are a wide variety of options in the area of annuities, so I won't speak to any specifics or even make any generalizations.  The point I am making is that a winner can choose to invest a portion of the winnings in taxable investments, and some in tax-sheltered investments (annuities).

              Besides, when a person chooses the annuity option from the lottery, SOMEONE else is getting paid as well.  I would rather exercise my privilege to choose to invest MY money WHERE I want to and also get paid in the process of doing so. 

              TAKE THE CASH VALUE OPTION.

              Get MONEY!!! Winning a JACKPOT lottery is all the HOPE and CHANGE I desire!!!  NOW give me MONEY!US Flag

              The guy who won the presidency in 2008 really won the lottery...he is now millions richer, travels in first class style, and even has a staff that would be the envy of the richest Powerball winner (she has a staff of 2). Every night he goes to sleep, he probably plays the close of Dave Chappelle's Show: I'm rich beyatch!


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                Posted: April 10, 2007, 11:46 am - IP Logged

                If I win a MM jackpot, I would choose lump sum (cash option).

                  dvdiva's avatar - 8ball

                  United States
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                  September 17, 2003
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                  Posted: April 10, 2007, 3:13 pm - IP Logged

                  Considering the likelyhood of future tax increases it's far smarter to take lump sum now and put the money into different trusts. Another big advantage (assuming your state allows trusts to claim the prize) is protection against lawsuits.

                  Even if you can't handle money yourself a trust that is set up for you would generate money for the rest of your life. I personally find the whole annuity jackpot a scam. Prizes outside the US are given as cash and the advertized jackpot is what you get a check for. In the US you will only get 25-33% of the advertized amount with some lame excuse that you could choose the annuity which is just an IOU.

                    LuckyLilly's avatar - savy chick.png

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                    Posted: April 10, 2007, 3:26 pm - IP Logged

                    Let's say you live in a state that taxes lottery winnings at 8%, and you win $20 million.  Would it pay to take the annuity and move to a state that doesn't tax lottery winnings?  You don't end up paying taxes to the state you bought the ticket in, do you?  Just your state of residence?

                      konane's avatar - wallace
                      Atlanta, GA
                      United States
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                      March 13, 2003
                      3333 Posts
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                      Posted: April 10, 2007, 4:07 pm - IP Logged

                      Considering that "Fair Tax" http://www.fairtax.org/site/PageServer is gaining traction and could replace our entire federal income tax system and embedded taxes we never realize we're paying , then it is conceivable that lottery wins would not be taxable under Fair Tax.  Big Grin

                      Take the money and run is my opinion concerning any potential jackpot win.

                      Good luck to everyone!

                        Avatar
                        NY
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                        October 16, 2005
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                        Posted: April 12, 2007, 1:03 am - IP Logged

                        Let's say you live in a state that taxes lottery winnings at 8%, and you win $20 million.  Would it pay to take the annuity and move to a state that doesn't tax lottery winnings?  You don't end up paying taxes to the state you bought the ticket in, do you?  Just your state of residence?

                        There may be exceptions, but states generally tax income from that state. Becoming a non-resident won't change where the money comes from.