I am 42yo, I have not won, but I play sometimes for fun, then I started to think which one would I choose. Lump Sum or Annuity? What about you guys?
We all claim to be good investors, even me, but 70% of people who win loose their fortune within the first 3-7 years. That is something to consider.
After crunching the calculator to death I think that annuity payments might give me a better return. What do you guys think?
Hypothesis: 1-2
1) If I win 26M Jackpot and choose the lump sum I end up with $13,520,000. The cash option is between 45-55% (lump sum). I chose 52% for my example. I am in California so I get taxed 25% of what I get, that's -$3,380,000.00 for a total of $10,140,000.00. (California does not have State taxes.)
Ok, now let's pretend I am a decent investor and put the money in a Trust Fund where I found a 4% interest a year out of the principle. From the principle $10M at 4% interest is $405,600 a year. But bad news, cash coming out of a Trust Fund is taxed AGAIN! In my understanding. So I will be taxed -$101,400 which is 25% of $405,600. That comes to $304,200 a year. Then I have to pay Lawyers, Accountants, and Financial Advisors, and be able to trust them and family.
2) If I choose Annuity payments for the $26M Jackpot, I get paid 2.5% interest the first year, and it continues to grow until it reaches 5.1% the last year of 26 years.
Let's take the taxes out right away. So, out of $26M jackpot I am taxed 25%, that is -$6,500,000 for a total of $19,500,000 net. The first year I will receive the 2.5% out of $19.5M, equals $487,500 in my deep pockets. End of story! I would invest $77,000 a year out of my annuity into a Trust Fund so I can live off the interest at the end of 26 years, I would be 68yo. I read of a couple who chose 26 annuity payments, but forgot to save for after their money ran out. They where dead broke.
To conclude, the second choice makes more sense to me since the 26M won't be cut by about 50%, then taxed 25%. Out of that I will be taxed AGAIN an additional 25% because interest from a Trust Fund is taxed as income. Then I have to pay Lawyers, Accountants, and Financial Advisors a great deal, not to mention the stress of who should I trust that won't swindle a nickel here and penny there. Or, which family member that came out of the wood work will take the money and run, or any lawsuits that puts all that money in jeopardy. And maybe bad investment choices takes me down a notch.
The only way it would be worth receiving the lump sum to beat the Annuity payments for me would be if I could find a 7%+ returned interest in a Trust Fund on the principle of $10M. Plus, if I was able to invest a good chunk in property that gave me a 12% ROI (Return Of Investment) per year. But, that is hard to find, and is it worth it? Or, if I won a 60 Million Jackpot. Which is enough money no matter how you put it.