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How are payments invested?

Topic closed. 20 replies. Last post 8 years ago by DC81.

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claymore's avatar - basket
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Posted: August 12, 2008, 5:36 pm - IP Logged

Now before everyone starts throwing stones at me, I did use the search function...however, I admit it was a lack-luster attempt. I also did a quick scan of the MM Website, but my college student brain refuses to absorb anything that does not begin with "cliffnote."

 

What I would like to know is:

If one purchases a Mega Millions ticket, hits the jackpot, and chooses to take 26 annual payments, how is the remaining principal invested?

 

Is there a guaranteed rate of return? What is it? Where would one find this information?

 

Many, many thanks in advance.

 

claymore

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    Posted: August 12, 2008, 5:41 pm - IP Logged

    From the Ohio Lottery site:

    "Upon claiming the Mega Millions jackpot, the prize winner is given the option to receive the prize winnings in a single cash payment. The gross cash option will represent the sum of the first annuity installment plus the net proceeds from the sale of the government securities originally purchased to fund the annuity prize. Government securities are susceptible to financial market conditions; therefore the amount that is actually realized may vary from the amount originally invested, especially with the passage of time. As a result, the risk of loss rests with the prize winner."

      claymore's avatar - basket
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      Posted: August 12, 2008, 5:48 pm - IP Logged

      That information is similar to what I have found.

       

      So there are no guarantees...

       

      (>_<)

       

      Cash option always then, lol.

       

      Thanks.

       

      claymore

        ThatScaryChick's avatar - x1MqPuM
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        Posted: August 13, 2008, 12:55 am - IP Logged

        I would always choose cash. Who knows how the government will be 3, 5, or 10 + years down the road.

        "No one remembers the person who almost climbed the mountain, only the person who eventually gets to the top."

          TheGameGrl's avatar - character catafly.jpg
          A long and winding road
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          Posted: August 13, 2008, 11:23 pm - IP Logged

          one amount goes into Uncle sams right pocket and one amount goes into his left pocket.

          ~~Is it true, Is it kind,Is it necessary. ~~~

           Thanks be to the giving numbers: 1621,912,119 02014

            justxploring's avatar - villiarna
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            Posted: August 14, 2008, 12:05 am - IP Logged

            Not true, but I don't want to get into another argument.  They are talking about the initial amount to make the lump sum payment, meaning that if they advertise $100 million, the cash option might vary.  Once annual payments are chosen, you have a structured settlement and you will get the same check every year. 

            People always choose to read things the way they want to, whether or not they understand the verbage.  I hope you are not a financial planner or investment counselor, since you would be facing a lot of lawsuits by giving incorrect advice.  Yes, I would take the cash option anyway, but the quoted paragraph specifically talks about when someone chooses the cash option and says nothing about annual payments.  Because market conditions change all the time, the amount invested to reach the advertised jackpot might yield a lower lump sum payment.   

            I am sure you can call any state lottery and get the same answer.  The lottery does not pay winners a variable annuity.  It is a fixed annuity, which is a stream of income over a certain number of years in regular payments.  Powerball pays a graduated annuity which increases over 30 years.  In any case, the total payments must add up to the annuity contract. 

            If you choose the cash option, you get the cash the Lottery would have invested over annuity period to pay the advertised prize amount.  That is all that paragraph is telling you which is that, since that interest rate will vary, your cash amount isn't set in stone.  That is why it is called an "estimated cash option."

              justxploring's avatar - villiarna
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              Posted: August 14, 2008, 12:33 am - IP Logged

              I would always choose cash. Who knows how the government will be 3, 5, or 10 + years down the road.

              True, I agree.  However, what if the law changes and lottery prizes are no longer subject to federal tax or we no longer have any income tax?  Then you would benefit over time. 

              Scary, FYI when the entire banking system collapsed, the people who lost all their money had it in savings banks.  You've probably read about Babe Ruth and how he handed money out to people, right?  He had invested in annuities to provide a lifetime of payments for his family and was not hurt by the market crash. 

                four4me's avatar - gate1
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                Posted: August 14, 2008, 12:38 am - IP Logged

                I heard somewhere that the lottery invests the annuity owed to a person that takes the annuity and thats how they make additional money off of your win. And are able to pay you the interest your annuity earned.

                Big John says. You don't hit the number. The number hits you!!!!

                               I'm not Big John, I'm Four4me, Big John's a friend.
                  justxploring's avatar - villiarna
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                  Posted: August 14, 2008, 12:53 am - IP Logged

                  I heard somewhere that the lottery invests the annuity owed to a person that takes the annuity and thats how they make additional money off of your win. And are able to pay you the interest your annuity earned.

                  Anytime you get annuity payments, that's really all you are getting.  A 30 year annuity to me is a lousy deal.  I remember when the matrix changed in FL for the Lotto.  That was before the cash option and the payments were over 20 years.  So $1 million was $50,000 a year or 5%.  People weren't happy and the Lottery announced that the reason the payments changed from 20 to 30 years was to give the winner more money.  I even remember the example they gave which was that a $6 million prize would be $240,000 a year for 30 years and yield $7.2M.  (lower interest, but a higher total over 30 years)  I don't know anyone who has won a jackpot in Florida, so I can't say for sure, but I don't think that's true.  I believe they just divide the jackpot by 30.   You can do a lot better. 

                    Coin Toss's avatar - shape barbed.jpg
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                    Posted: August 14, 2008, 2:53 am - IP Logged

                    A while back we had a thread about this and someone pointed out that the advertised jackpot doesn't even actually exist.

                    In other words, let's say PB or MM has a jackpot of $100,000,000 for an upcoming drawing. There is no $100 million. That amount is based on the winner taking an annuity over a drawn out period of years.

                    That's why the cash value for the same jackpot is 50% or less.

                    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.

                      DC81's avatar - batman39
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                      Posted: August 14, 2008, 12:46 pm - IP Logged

                      Mega Millions is closer to 39-40% less than the jackpot at this point though that's probably because their annuity pays out over  I think, five less years than Powerball. For example right now the advertised jackpot at 70 million has a cash option of 42.5 million which is 60.7% of the annuity.

                      You can't predict random.

                        justxploring's avatar - villiarna
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                        Posted: August 14, 2008, 3:09 pm - IP Logged

                        Mega Millions is closer to 39-40% less than the jackpot at this point though that's probably because their annuity pays out over  I think, five less years than Powerball. For example right now the advertised jackpot at 70 million has a cash option of 42.5 million which is 60.7% of the annuity.

                        That's what I was saying regarding how money is invested.  A 20 year annuity has to have a higher interest rate to reach the same jackpot as a 30 year annuity.   MM is 26 years, so it's somewhere in the middle.  PB cash option is usually a little less than 50% and MM is usually around 60%.  I know I've said this before when people have asked why the cash option for MM is higher than PB when the jackpots are similar.  It's all based on what initial investment is required to payout the jackpot after XX years.  That is what the paragraph Stack quoted was saying.  If annuity rates are on the rise, then waiting the full 60 days after the drawing might be beneficial.  If they are dropping, then the cash option might be lower than estimated 2 months earlier.  It has nothing to do with losing money or getting a smaller check over time if you select 26 year annual payments.  Here it is again.

                        "Upon claiming the Mega Millions jackpot, the prize winner is given the option to receive the prize winnings in a single cash payment. The gross cash option will represent the sum of the first annuity installment plus the net proceeds from the sale of the government securities originally purchased to fund the annuity prize. Government securities are susceptible to financial market conditions; therefore the amount that is actually realized may vary from the amount originally invested,  In other words, the money is being invested to fund the prize for a particular game.  Depending when you claim your prize, market conditions can change. 

                        especially with the passage of time. As a result, the risk of loss rests with the prize winner." 

                        It is merely a disclaimer saying that if they estimate a cash value of 61% and it turns out to be 58%, they are not responsible for paying you the difference.  They are in no way saying if you take the 26 annual payments the jackpot you won might lose value over the years.  Once you are given a contract for a guaranteed yield, the total payments will add up to that face value at maturity.

                          claymore's avatar - basket
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                          Posted: August 14, 2008, 6:51 pm - IP Logged

                          "Once you are given a contract for a guaranteed yield, the total payments will add up to that face value at maturity."

                           

                          Ohhhh, okay.

                           

                          That's exactly what I wanted to know. I wasn't sure if someone could end up with LESS then what they understood they were getting at the time of choosing the annuity over cash.

                           

                          Thanks!

                           

                          claymore

                            justxploring's avatar - villiarna
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                            Posted: August 15, 2008, 4:36 am - IP Logged

                            "Once you are given a contract for a guaranteed yield, the total payments will add up to that face value at maturity."

                             

                            Ohhhh, okay.

                             

                            That's exactly what I wanted to know. I wasn't sure if someone could end up with LESS then what they understood they were getting at the time of choosing the annuity over cash.

                             

                            Thanks!

                             

                            claymore

                            For some people, taking annual payments makes sense.  For others it doesn't.   You can usually make more money over the 20 or 30 years by investing wisely.   That said, it's comforting to know you'll be getting another check soon no matter how badly you mess up that year.

                            People are always concerned about the payments stopping.  I would have the same concern, but AFAIK no state lottery has ever folded.  If I'm wrong, then I'd appreciate a comment from someone who has this knowledge.  Regarding government securities, they've always been considered to be a safe & conservative investment.  I guess it depends on how much confidence you have in our government & its stability.  All investments have risks.  (getting out of bed is a risk)   

                            The one thing that will cause the value of the annual payments to decrease over time is inflation.   The money you receive in 20 years won't buy nearly as much as it does today. 

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                              Posted: August 15, 2008, 6:57 pm - IP Logged

                              The one thing that will cause the value of the annual payments to decrease over time is inflation. The money you receive in 20 years won't buy nearly as much as it does today.

                              That statement alone is the prime reason as to why you're NOT to take an annuity!!! It just doesn't add up to take an annuity, because each year the dollar loses it's buying power!!!!

                              Keep dreaming the impossible dream, it just may come true! Thumbs Up