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How are payments invested?

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

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justxploring's avatar - villiarna
Wandering Aimlessly
United States
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November 5, 2005
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Posted: August 15, 2008, 7:26 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!!!!

Which is why I added that last paragraph.  However, that has nothing to do with answering the OP "how are payments invested?"  It would be like asking

"How many tomatoes should I use to make salsa?"

and then answer

"You might get salmonella, so I wouldn't eat any tomatoes."

 

(bad analogy, but you see my point) 

    Bradly_60's avatar - disney37
    Atlantic Mine, Michigan
    United States
    Member #416
    June 23, 2002
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    Posted: August 15, 2008, 7:59 pm - IP Logged

    The Federal Government will probably never default on their loans (bonds and notes) if they run out of money they can just print more (not wise economically but if it happened that is what they would do).  This is why the state lotteries will invest annuities into one year US Treasuries.  They take the first one and pay it to you when you claim it and then they buy 25 one-year treasuries for the remaining years.  After one year passes they pay you one of those and reinvest the other 24.  The problem with such a long term investment is interest rate risk.  If they drop down you aren't going to get as much as the last one and if they go up you could get more.  So in my opinion I would take the cash option and invest it and get a higher return then zero risk bonds issued by the US Treasury.  IT would be very hard not to return a measly 2-3% that the one years notes are returning right now.

     

    Brad

      time*treat's avatar - radar

      United States
      Member #13130
      March 30, 2005
      2171 Posts
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      Posted: August 16, 2008, 8:24 pm - IP Logged

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

      I like the way you think. Wink

      In neo-conned Amerika, bank robs you.
      Alcohol, Tobacco, and Firearms should be the name of a convenience store, not a govnoment agency.

        savagegoose's avatar - ProfilePho
        adelaide sa
        Australia
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        April 11, 2006
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        Posted: August 17, 2008, 2:31 am - IP Logged

         heres an article i read a little while ago, the biggest buy back of bonds etc in history. seems  the  states didnt want to lose out with this credit crisis, and forced banks to buy back the now worthless bonds.  billions worth, i was wondering if the lotto annuities are part of that deal.  gee having the gov on your side looking after you sure makes the annuity a safer option.

         

        http://www.finfacts.com/irishfinancenews/article_1014412.shtml

         

         

        ps thats kinda got a different  spin to it, earlier article  banged oon about how the states where getting their money back.

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          justxploring's avatar - villiarna
          Wandering Aimlessly
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          Posted: August 17, 2008, 5:05 am - IP Logged

          I've found government securities to be very stable.  I've also purchased US Savings bonds.  I know someone here keeps saying they don't keep up with inflation and that I'm "bad in math" but right now I'm earning 8.22% and that's tax deferred. 

          Anyway, it's true that you can usually get a much better interest rate by taking the cash, but interest on what?  If you have $10 million and the lump sum pays only 50%, you need to do the math to figure out how much time it will take to get back that cut.  So the percentage of the lump sum does matter.   

          I've already written many times that the annuity is not a great way to increase your wealth and that most people will make more money by taking the cash.  However, there are some pros and cons.  The advantage to receiving annual payments is knowing a check is coming in the mail every year and exactly what the amount will be.  So someone who doesn't enjoy investing won't have to worry about dealing with the ups and downs of the financial markets.  If it's true that most people go through their winnings in 5 years, perhaps some people would find annual payments beneficial for their emotional well-being.  One problem is that after 30 years (or 26 for MM) the payments will stop.

          The biggest drawback is that the payments stay the same and you might find that you need more money in the future to buy property, start a business, pay for medical expenses, etc.  That's why some people sell their structured settlements.  Another worry is what others here have asked, that is, what if our government collapses?  However, if that happens, what good will our banks be?  Money won't matter and I'd be more concerned about food riots and looting than investments. 

          So maybe the best suggestion is that everyone who wins the lottery should take the lump sum, build a bunker (or a nuclear fallout shelter) and stock up on canned goods, guns & ammo.   

            DC81's avatar - batman39
            MI
            United States
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            August 31, 2007
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            Posted: August 17, 2008, 10:30 am - IP Logged

            At least some former winners who sold their annuity end up with more problems, especially with taxes which for some reason the ones I've read about thought they could actually still get away with paying the taxes on only what the yearly annuity payment is and not the lump sum they acquired. Though I think at least some of them had no choice but to take the annuity at the time they won but they seriously should know better. Probably doesn't help that they take this lump sum because they need money due to squandering what they had and putting themselves in debt. The real benefactor is the company that probably bought the annuity for less than half its value.

            8.22% doesn't sound bad at all, I do believe that it is a bit better than the usual rate of inflation, unless it's a bad year like 2008 is turning out to be and inflation is a bit higher than what the norm has been. On the other hand I think that 8.22% is still above that as well. I think the key is not putting all your eggs in one basket and diversifying! Thumbs Up

            You can't predict random.