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Annuity or Lump Sum?

Topic closed. 74 replies. Last post 4 years ago by redhot7.

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Which one? Please pick!

Annuity [ 15 ]  [23.44%]
Lump Sum [ 49 ]  [76.56%]
Total Valid Votes [ 64 ]  
Discarded Votes [ 4 ]  
Teddi's avatar - Lottery-008.jpg

United States
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May 13, 2013
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Posted: May 14, 2013, 1:39 am - IP Logged

You can make more and I agree. I was just pointing out how exactly one can do that. Most people are only used to handling hundreds to thousands of dollars at a time....it will be tough for them to handle millions at a time.

 

Of course there are those who know alot more (hedge fund managers, investment bankers, active mutual fund managers, Warren Buffett/Peter Lynch of the world, etc.) but it seems to me hard to find who you can trust with all those money. After all, they are looking to make as much money off of you because you are (in all likelihood) an average joe who is excited with millions and are looking to entrust your money to a "professional" who knows what they're doing.

 

I guess it's all different opinion. And it comes down to what you want to do.

 

You know what would be cool to do?  Go follow-up all these 100+ million lotto winners in the last few years...then go find them 30 years down the line...do you think they could've beaten the annuity total?  That'll be cool to see what people actually do with their money. :D

I know that the annuity looks like a better bet, but it isn't. If you do what you're supposed to do and get a financial advisor, you end up making more than the full $80 the annuity guy gets. 

If you're concerned about how much money your financial advisor can manage, get more than one. Give each a certain amount to invest for you. If anyone has every watched an episode of American Greed on CNBC you'll see it's never a good idea to invest everything with one person. 

Last year, the federal tax on over $1M was 35% (not @25%, they take the 25% right away and you owe them the remaining 10% come tax time) this year the taxes are 39.6%. The people who won and got the lump sum last year, will pay almost 5% less in taxes than the people who will get the annuity check this year. 

The biggest reason I like lump sum over annuity is I do not want to owe money on anything. Any house I buy, any car(s) I buy, furniture etc I buy, I want it without paying a single penny in interest to any bank. With an annuity, unless you win a huge amount, there isn't going to be enough to buy those things free and clear. If that doesn't matter, and making mortgage or car payments don't bother you, then this would not be an issue for you, it is for me. 

David Lee Edwards (after taxes) walked away with $27M. The financial advisor he hired said that he tried to put Edwards on a budget and advised him to live off the interest and not spent more than that. Edwards' monthly haul from interst alone would have been $85,000. Monthly, not yearly. If he even made half that, it would still be more than enough, especially when you don't have bigger ticket costs to pay for, like mortgage and car payments.


    United States
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    May 13, 2013
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    Posted: May 14, 2013, 9:50 am - IP Logged

    I know that the annuity looks like a better bet, but it isn't. If you do what you're supposed to do and get a financial advisor, you end up making more than the full $80 the annuity guy gets. 

    If you're concerned about how much money your financial advisor can manage, get more than one. Give each a certain amount to invest for you. If anyone has every watched an episode of American Greed on CNBC you'll see it's never a good idea to invest everything with one person. 

    Last year, the federal tax on over $1M was 35% (not @25%, they take the 25% right away and you owe them the remaining 10% come tax time) this year the taxes are 39.6%. The people who won and got the lump sum last year, will pay almost 5% less in taxes than the people who will get the annuity check this year. 

    The biggest reason I like lump sum over annuity is I do not want to owe money on anything. Any house I buy, any car(s) I buy, furniture etc I buy, I want it without paying a single penny in interest to any bank. With an annuity, unless you win a huge amount, there isn't going to be enough to buy those things free and clear. If that doesn't matter, and making mortgage or car payments don't bother you, then this would not be an issue for you, it is for me. 

    David Lee Edwards (after taxes) walked away with $27M. The financial advisor he hired said that he tried to put Edwards on a budget and advised him to live off the interest and not spent more than that. Edwards' monthly haul from interst alone would have been $85,000. Monthly, not yearly. If he even made half that, it would still be more than enough, especially when you don't have bigger ticket costs to pay for, like mortgage and car payments.

    Thanks for the reply. It's an interesting dicsussion! I'm starting my first full time job this July and I've been doing alot of reading up on retirement investing and the financial services industry. And it seems that it's hard to find a fiduciary (someone who is legally obligated to look out for your best interests instead of their own) who can really do well with your money.

     

    I agree that if you know exactly what you're doing you can be doing very welll and definitely beat the annuity. I guess it's just my mindset in that most winners consult "professionals" who are more than likely to tell them to take lump sum because then they would have a massive portfolio (even if it's partially the jackpot) to manage. They are as much about making themselves money, maybe a bit more so, than looking out to grow your specific portfolio. Now of course the best thing is, as you said, is to consult multiple people (either fiduciary, or they charge flat fee and not commission) and then do as much reading on your own as possible.

     

    Good call on the taxes, that was my mistake and yes jackpot winners will be in the highest tax bracket at almost 40% as you said. And you're right in that annuity will be taxed as income and jackpot winners will definitely be in highest income bracket for the rest of the annuity payments (assuming more than 1m a year). Of course the other unknown is how much they will change taxes in terms of financial investments and dividends and capital gains..which is where the lump sum will be making its money. In addition there is the "tax" of the fees you pay to your one or more financial advisors/portfolio managers..that can also run a few percentage points. Not to mention the ups and downs of the market...if another 2000/2008 market crash happens...you just lost almost 50% of your wealth in one year.

     

    I guess I'm just really learning myself too because I too want to beat the annuity and have the big cash now so incase the Multi State Lotto Assoc goes belly up or something. But I just want to know exact specifics. Everytime people talk it's always "find lawyer, get with financial advisor, make tons off interest and live happily ever after!"

     

    Well do we know exactly what assets we will be buying with our milions that will grow our money wild? Warren Buffett has said to never buy anything you don't understand. Does the average Joe jackpot winner know what hedge funds, or derivatives, or even mutual funds are? What about domestic stocks vs international stocks vs bonds vs REITs vs venture capital, etc. etc.? It'd be interesting to know what the "professionals" know when you grow money. There was a study that said the active mutual fund managers did not beat the market average a majority of the time between 2002-2012...and they were more expensive since they had higher fees and so your real return was actually lower. Again I point to the fact that the majority of people have NEVER handled millions of dollars at a time and so they would either be likely to be "advised" into things they don't fully understand or think they do....and their wealth actually does not beat the annuity at the end of the 26/30 years. Anyway, that's my guess and I think it'd be cool to do a study of all the lotto winners after 30 years and see exactly how much wealth they made.

     

    The other thing is if I win the jackpot, the annuity would be way way more than enough for me to splurge on all I want. Even if it's $1m....after tax that's at least $500,000 and while that's "nothing" compared to say if you got a few million in lump sum....$500,000 is an INSANE amount of money for the average folk. I can easily pay off the house and my student loans and still have at least 100,000 left over. In my opinion, if people are wanting to splurge multiple millions right off the bat on cars/houses/boats/etc. then that's not the smartest decision. (At least save up and know the maintenance cost, there was a UK guy who won a few million in the UK lotto and blew it all in several years and had to go back to work at his old menial job). Coming into a huge amount of cash does NOT make a person wealthy...if they continue their paycheck to paycheck spending habits their wealth will be gone quickly. There has to be a change in mindset and behavior. But I was talking about the bigger annuities...heck even the smallest PB jackpot is 40m so annuity would be close to about 1m a year....which to me is already great because where else can you make a million dollars a year for 30 years?!?!?!

     

    Living off the interest is another thing that is too generic. What assets allows you a penalty free, low-tax income stream while it generates "interest" or dividends? That is the important question to answer.

     

    So looks like his monthly interest haul is 85,000 which is great when you look at it, but let's account for inflation rate (which is about 3% yearly average). So his 85,000x12 (1.02million) is about 3.77% of his 27million. Now if that's all he is generating in interest, depending on how much he spends, he will either barely be preserving his wealth above the inflationary rate or be losing money each year if he spends more than 3% each year. Also different financial products will have different maturity times or conditions on when you can withdraw them. It would be interesting to see what assets his financial advisors bought him into.

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      NH
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      Posted: May 17, 2013, 1:11 am - IP Logged

      I can't imagine what the taxes will be in 10 years, 20 years. But one thing is certain, they are going to be A LOT higher than they are now...Take the Lump sum when your tax burden is going to be the lowest in your lifetime.

        Teddi's avatar - Lottery-008.jpg

        United States
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        Posted: May 17, 2013, 9:10 am - IP Logged

        Yeah, I'm with Gym on this one. I can't imagine the taxes going down. At least, not on an amount like this. Though anything is possible.

        As for the issue of annuity, all I can say is that, if I'm perfectly honest, I'd choose the lump sum purely because I'm paranoid. Yes, the arguments for lump sum payouts I understand and agree with. But my real motivating factor is..."what if".

        If the entire system went bust, what could you do about it? Sue? Okay, sue, get the judgment in your favor and it still doesn't mean you'll actually collect.

        I believe the lump sum is safer with me than the annuity is out there in the ether.

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          Toronto
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          Posted: May 17, 2013, 1:04 pm - IP Logged

          Yeah, I'm with Gym on this one. I can't imagine the taxes going down. At least, not on an amount like this. Though anything is possible.

          As for the issue of annuity, all I can say is that, if I'm perfectly honest, I'd choose the lump sum purely because I'm paranoid. Yes, the arguments for lump sum payouts I understand and agree with. But my real motivating factor is..."what if".

          If the entire system went bust, what could you do about it? Sue? Okay, sue, get the judgment in your favor and it still doesn't mean you'll actually collect.

          I believe the lump sum is safer with me than the annuity is out there in the ether.

          I don't really agree. Your "contract" is with the lottery, the government, not whatever security they invested in. So even if that goes bust, you'll still get

          the money from the government. IF something happens to the US government then your lumpsum amount would've probably been affected as well. It'd

          be like the end of the world anyway. 

           

          And I don't think taxes will go up and up non-stop. But who knows.

            mikeintexas's avatar - tx avatar-1.gif
            Texas Panhandle
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            December 20, 2012
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            Posted: May 17, 2013, 2:53 pm - IP Logged

            I don't really agree. Your "contract" is with the lottery, the government, not whatever security they invested in. So even if that goes bust, you'll still get

            the money from the government. IF something happens to the US government then your lumpsum amount would've probably been affected as well. It'd

            be like the end of the world anyway. 

             

            And I don't think taxes will go up and up non-stop. But who knows.

            Who knows is right.  In the U.S., tax rates have fluctuated a great deal and as most people know, the top rate recently increased from 35 to 39.6%.  I won't blather on about why I think taxes WILL go up, but I do remember the U.K. having a 90% tax rate on the highest earners. (read that in an interview w/ Mick Jagger a couple of yrs. ago)  I can see that happening here because as Mick said, people over there are jealous of success.  I see that here in the States more and more lately, people griping about "obscene profits" and the recent "Occupy" movement.  Not making a political statement, it's just what I've seen w/ my own two eyes.

            I think the govt. very well could bilk you out of your lottery winnings.  They can take your land via eminent domain for any reason or even allow a private entity/corporation to take it for their own use. ( Donald Trump has done that for a casino, T. Boone Pickens can if he ever wants to run a water pipeline/electric lines from the Texas Panhandle to points south, just to name two off the top of my head) Yep, I truely believe the govt. could take your money and you couldn't do a thing about it.  It's often said you can't fight City Hall....try fighting the crooks in Congress or even some worthless bureaucrat who decides his dept. needs that money more than you do. 

            I did some quick research on federal spending and also calculated the taxes to be paid on the cash option on Sat. night's Powerball.  (it's going up so quickly, it will most likely be a significant amt. more than this, but these figures are of this writing)  The winner(s) would pay right at 150 million in taxes...enough to fund the fed. govt. for about 1.1 seconds.

            So, yeah, I think taxes will keep going up and up non-stop.    I'm not trying to argue w/ you or even being contentious. I admire your optimism, wish I still had some left.


            A people that elect corrupt politicians, impostors, thieves and traitors are not victims...but accomplices.
             - George Orwell

              dk1421's avatar - Lottery-024.jpg
              North Carolina
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              Posted: May 17, 2013, 3:21 pm - IP Logged

              I don't really agree. Your "contract" is with the lottery, the government, not whatever security they invested in. So even if that goes bust, you'll still get

              the money from the government. IF something happens to the US government then your lumpsum amount would've probably been affected as well. It'd

              be like the end of the world anyway. 

               

              And I don't think taxes will go up and up non-stop. But who knows.

              I'm completely disagreeing here. In North Carolina, the governor TOOK the money raised by the lottery, which was supposed to go directly to the schools (*cough* that's why it's called the 'education lottery' *cough*) and used it to pay bills, three years ago.

              If they can completely disregard and CHANGE the laws for their benefit, who is not to say they can't do that to your winnings?

              Now, I'm not a conspiracy theory person, but I do not trust the government to look out for me anymore. I'm actually very sad about that.

              Personally, I'd rather do annuity because of my own spending habits and needing a budget, but because I can't trust, I will choose the lump sum and have multiple financial advisors budget me instead.

              "Don't be a schmuck, always take the cash." -Coin Toss

                Teddi's avatar - Lottery-008.jpg

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                Posted: May 17, 2013, 6:00 pm - IP Logged

                I'm completely disagreeing here. In North Carolina, the governor TOOK the money raised by the lottery, which was supposed to go directly to the schools (*cough* that's why it's called the 'education lottery' *cough*) and used it to pay bills, three years ago.

                If they can completely disregard and CHANGE the laws for their benefit, who is not to say they can't do that to your winnings?

                Now, I'm not a conspiracy theory person, but I do not trust the government to look out for me anymore. I'm actually very sad about that.

                Personally, I'd rather do annuity because of my own spending habits and needing a budget, but because I can't trust, I will choose the lump sum and have multiple financial advisors budget me instead.

                WTF!!! He took the education money? And no one stopped him?

                In any case, you have proven my point. I believe anything is possible and 30 years is a lot of time for "anything" to happen. Fact is, when something happens to lottery winners no one cares. If things go bad and for whatever reason they are unable to pay out the funds, it'll be a very steep uphill battle to get it back. Lawsuit or no lawsuit. 

                Governor can apparently redirect funds, safe pensions can disappear overnight, I'm not taking the chance that $600M won't look tempting enough for someone to try and mess with over the span of 30 years. Sorry, too many guaranteed payments in other areas have disappeared once too often. They'll win a judgment and still collect nothing. 

                 

                As for the tax issues, I never said taxes on the rich would go up continuously (though it is highly likely), I'm saying I cannot see it going down. There is an anti-wealth fervor that seems to be growing daily.  I think if things get bad, they'll jack the taxes up on millionaires with majority voter consent. I'll take my chances with a cash option, hide 10% of it in a flowerbed or somthing. LOL. If we ever have a repeat of the 1930's, at least I'd have something (cash, gold, diamonds, whatever) stashed away that the banks or stock investments wouldn't wipe me out completely. Like I said, I'm paranoid. I'm not a big believer in crazy conspiracy theories, but I do believe people are greedy and can't help themselves no matter the consequences to others. Hence the recession now. 

                  Win$500Quick's avatar - Lottery-050.jpg
                  Florida
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                  Posted: May 17, 2013, 6:14 pm - IP Logged

                  I am pro lump sum, but in this case of $600 million. I would really consider taking the annunity if I was the sole winner which would be $15 million dollars a year. That is more than I need and most state lottery jackpots.

                  Guess Who's Back?

                    EZMoney's avatar - weedss04lx1

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                    Posted: May 17, 2013, 6:17 pm - IP Logged

                    Yeah, I'm with Gym on this one. I can't imagine the taxes going down. At least, not on an amount like this. Though anything is possible.

                    As for the issue of annuity, all I can say is that, if I'm perfectly honest, I'd choose the lump sum purely because I'm paranoid. Yes, the arguments for lump sum payouts I understand and agree with. But my real motivating factor is..."what if".

                    If the entire system went bust, what could you do about it? Sue? Okay, sue, get the judgment in your favor and it still doesn't mean you'll actually collect.

                    I believe the lump sum is safer with me than the annuity is out there in the ether.

                    I can't imagine taxes going up significantly more in the next couple decades.  Everyone I know is taxed out.  Even if you hit a jackpot and become a one-percenter there are plenty of tax loopholes to take advantage of. 

                    I do agree though that the lump sum should always be the chosen option.  Invest it yourself.  Never trust others.

                      sookie's avatar - nw femalewiz.jpg

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                      Posted: May 17, 2013, 6:24 pm - IP Logged

                      Honestly I'd take the lump sum unless the person is very, very bad with budgets and saving.

                      Me personally I'd always take the lumpsum and invest it myself.

                        helpmewin's avatar - dandy
                        u$a
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                        Posted: May 17, 2013, 6:38 pm - IP Logged

                        Honestly I'd take the lump sum unless the person is very, very bad with budgets and saving.

                        Me personally I'd always take the lumpsum and invest it myself.

                        very bad with budgets and saving

                        why would you assume someone would be bad with the money reason to taking annuity?

                        i never hear that story.

                        i hear more stories of people that have took Lump sum already BrokeGreen laugh

                        Let it Snow Snowman

                          helpmewin's avatar - dandy
                          u$a
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                          Posted: May 17, 2013, 6:42 pm - IP Logged

                          I am pro lump sum, but in this case of $600 million. I would really consider taking the annunity if I was the sole winner which would be $15 million dollars a year. That is more than I need and most state lottery jackpots.

                          I Agree!

                          Let it Snow Snowman

                            sookie's avatar - nw femalewiz.jpg

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                            Posted: May 17, 2013, 7:40 pm - IP Logged

                            An annuity guarantees an income for someone bad at saving.  Lump sum can be good if you invest and save, your taxes are paid up front.  Annuity are subject to tax increases each year but you still have guaranteed income.

                             

                            Just myopinion.

                              Jill34786's avatar - Lottery-006.jpg
                              Windermere, FL/Franklin, TN
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                              Posted: May 17, 2013, 9:32 pm - IP Logged

                              I am pro lump sum, but in this case of $600 million. I would really consider taking the annunity if I was the sole winner which would be $15 million dollars a year. That is more than I need and most state lottery jackpots.

                              The PB annuity is heavily back loaded over the 30 yearly payments. The current $600 million jackpot pays out in year 1 a pre-tax amount  which is a bit over $10 Million. A $15 million payment doesn't even come until year 10. Payment 28-30 are each over $30 million pre-tax and there is no telling what the tax rate will be at that time.