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Take the Lump sum...not Annuity!

Topic closed. 38 replies. Last post 14 years ago by CASH Only.

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MichiganHopeful's avatar - WINGS

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Posted: February 17, 2003, 6:04 am - IP Logged

If you win lottery, take lump sum and invest

By RONALD LIPMAN

Q. Every time I buy a lottery ticket, they ask me whether I want the cash option or they simply assume I want the cash option. Apart from getting more money right away, which is financially smarter: taking the smaller amount now or taking the periodic payments?

A. The cash option is the way to go for most people. Here's why.

If you choose the annual payments, 1/25th of the total jackpot will be paid to you once a year for 25 years. If you choose the cash option, you will receive a lump-sum payment that is equal to what someone would pay you today for the right to receive those 25 equal annual payments.

With interest rates and market returns as low as they are today, taking the cash option should yield a relatively large payout.

Why? If you think about money you have in the bank today, one of your dollars will take an extremely long time to double in value, given the historically low interest rates currently being paid by banks. But if you could earn an 8 percent compound return on your money, a dollar could double in just nine years. When interest rates and market returns are low, it takes a larger lump sum to earn enough to make the same series of payments over a multiyear period.

In the financial world, a series of 25 equal payments is called an annuity, and it's fairly easy to value. In fact, the way the Texas Lottery figures out how much to pay you if you choose the cash option is by seeking bids from a preapproved list of investment firms to see what the cheapest cost would be for a 25-year annuity. When the investment firms make their bids, they're taking into consideration the low returns today, but they're also assuming interest rates and returns will rise over the next 25 years. A highly optimistic company will charge less today for a 25-year annuity.

So, if you win a $25 million lottery, and one company says they would take $13 million dollars today to pay you $1 million a year for 25 years, but another company says it would take only $12 million, how much do you think you'll be receiving as your lump sum payment? You guessed it. Only $12 million.

There are a few situations where taking the annual payments make sense. One is if you are the kind of person who likes to spend, spend, spend. If you have trouble saving money, you might be better off taking the 25-year payout. That way, you'll basically be putting yourself on an allowance. If you happen to blow through an entire year's payment without saving a dime, you'll be given a fresh start the following year.

But remember, $100,000 today is not the same as $100,000 in 25 years. Think about what new cars and homes cost in 1978. If you take the 25-year payout, you need to consider that inflation will be causing the products you purchase to increase in cost, and the purchasing power of the money you'll be receiving two decades down the road will be far less than today.

And what if there are a few years of hyperinflation during your 25-year payout? The real value of your fixed payments could drop significantly. That's as good a reason as any to take the money as a cash payment. If you have the money in your possession, at least you can invest it at a rate that keeps up with that hyperinflation.

You might also want to take the annual payments if you are currently earning little income, and the jackpot is not too large. For instance, if you win a $4 million lottery, you may be better off taking 25 payments of $160,000 each year, rather than one lump sum of about $2 million, all of which will be taxed in a single tax year. In 2003, the highest bracket is 38.6 percent, and it kicks in at $311,950 of income. By taking payments over 25 years, you will lower your income tax liability about 10 percent, based on today's tax rates, because you'll be earning less money each year.

On the other hand, if you are lucky enough to win a lottery so large that each of your annual payments will be $1 million or more, then you will not save as much income tax by taking your winnings over 25 years. Similarly, if you are already earning several hundred thousand dollars a year and your earnings will not drop even if you win the lottery, then receiving the payments over a 25-year period will not materially reduce the amount of income taxes you must pay.

You also need to think about your age. If you are older, you may not have 25 years left to enjoy all those payments. You may think it's best to take the cash option and spend the money as fast as you can.


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    Posted: February 17, 2003, 7:29 am - IP Logged

    How can ANYBODY disagree with that? BTW, the article was written in response to Lotto Texas, which still requires the choice when you PLAY, not after you win. Texas, California, NY need to change the rules so the choice can be made AFTER you win (remember I live in NY).

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      Posted: February 18, 2003, 12:01 am - IP Logged

      Thanks for explaining this so clearly.  I would really worry about a sudden burst of inflation reducing the value of a 25 year payout. http://www.rockauto.com

      http://www.rockauto.com


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        Posted: February 18, 2003, 8:13 am - IP Logged

        Denise: Some games' annuity options are 30 payments, including Powerball.

          Annuityok's avatar - disney19
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          Posted: February 18, 2003, 10:41 am - IP Logged

          You could triple you jackpot buy taking annuity.  let see you get  $125M.

          By chosing Annuity you can get about $75M, that is  about & 3.5M/per year in for cash option you get about $44M.  $3.5M is still a lot of money you can also invest it.  In ten years you get about total amout roughly equal to $40M, the cash option amount. From there, you have a lot money to invest and a 3.5M/peryear steady income.

          It realy denpends the Jackpot amount, you age and your investment skills. IMHO 

          The Player


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            Posted: February 18, 2003, 11:06 am - IP Logged

            Player: You didn't read that article carefully.


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              Posted: March 19, 2003, 3:14 am - IP Logged

              If you haven't noticed, I've been experimenting with the signature option.


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                Posted: March 24, 2003, 11:22 am - IP Logged

                Check out my LATEST signature:

                  Lottowiz34's avatar - spider
                  Miami,FL
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                  Posted: March 24, 2003, 9:23 pm - IP Logged

                  I prefer Annuity over Lump Sum the idea of receiving a paycheck for the next 20 yrs or so would do very well if your a responsible person with money like I am.


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                    Posted: March 24, 2003, 9:34 pm - IP Logged

                    Wiz: I would think a "responsible" person would know how to handle money, and therefore prefer LUMP SUM.


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                      Posted: March 26, 2003, 4:30 pm - IP Logged

                      Sandy, haven't you read all the posts suggesting that lump sum ALMOST ALWAYS is better than annuity payments?


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                        Posted: March 29, 2003, 11:30 am - IP Logged

                        Mission not quite accomplished.

                          Lottowiz34's avatar - spider
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                          Posted: March 30, 2003, 6:10 pm - IP Logged

                          Here's my personal opinion on this subject if your a "Responsible Person" with money then you should take the "Lump Sum" or the "Annuity" if you know how too handle your finances then the money will work for you either way depending on your current financial status and your intentions.If your not a responsible person when it comes too money and wouldn't know how too

                          handle a large "Lump Sum" of money then the "Annuity" option might be better for you as you learn from your mistakes along the way how too manage your money.So if you screw things up on the first check or so then you have 20 or 30 more left too get it right with some help

                          from a financial advisor or you could get a financial advisor too help with the Lump Sum.I think it's just a matter of preference or the individuals situation as far as which one would be better suited for him.


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                            Posted: March 30, 2003, 8:00 pm - IP Logged
                            Clarence: At least you live in Florida, where the cash/annuity choice is made AFTER you win.

                            Here in NY, you still must choose WHEN you play. Furthermore, several of the high-end scratch games are ANNUITY-ONLY. The NY Lottery is one of the nation's most corrupt lotteries. Fortunately, I live a reasonable drive from Connecticut.

                              Lottowiz34's avatar - spider
                              Miami,FL
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                              Posted: March 30, 2003, 8:59 pm - IP Logged

                              You know I read a lot of complaints about the New York

                              Lottery so you guys must really be getting "screwed" by them so my question too you is what are they doing that's causing so many New York players anger and frustration?