What about lotteries like Powerball and Mega Millions? They're not controlled by state entities, are they? Also, let's say somebody takes the annual payment option and passes before the payments are final. Could they leave that to somebody in their will or are there laws or rules against that?
Let's say you win a $10 million dollar lottery today and take the lump sum payment which would be $5 million dollars. If you take that $5 million dollars and invest it over a 25 year period, which is what you get in the annual installments, at a 5% compounding interest rate that money would grow to $17,429,942.78. At a 7% compounded interest rate it would have grown to $28,702,736.77. The lump sum will grow to be greater then the $10 million dollars over a 25 year period. http://www.moneychimp.com/calculator/compound_interest_calculator.htm
excellent point, but what about the 10 million invested in installments over the same period of time with the same interest rates?
Damn. You got me. $10 million /25 = $400,000 Current Principal:$ 400,000 Annual Addition: $ 400,000 Years to grow: 25 Interest Rate: 5% Future Value:$ 21,282,303.87
i can see why some people want the lump sum. you can do more right away with $5M than $400k, but if you are patient you will have all that and more. of course if your grandmother is 90 years old and wins the lotto you better talk her into the lump sum! if you have time to collect the installments then thats the way to go.
Of course this is based on now spending any of it. Once you take out the House, Car, old debts, some fun Let's say that gets ya to 4.5 Million [depending on the person and their tastes.] I wonder what the Stats are on lotto winners going broke Lump Sum versus Annual Payments We all would like to think . . *WE* WOULD NEVER BE SO FOOLISH and I can guarantee you . . every last one of those broke winners said/thought the same thing Rocket River
Another thing to consider is taxes. Taxes are historically low right now, so if you take the money now, you are paying historically low taxes on the lump sup. If you take the installments, you take on the risk that the current tax rates will go up. While you can't predict future tax rates, the theory is that if they are historically low now, they have a high probability of going up in the future. It would be crummy if you could have taken them at 35% today, but took the installments, and had the taxes end up being 45-55%.
The Mega Millions lump sum is greater than the Power Ball lump sum. I believe the tax on winning the lotto is somewhere between 22-25% fed + state tax. In Texas if you win the Mega Millions you essentially keep half of the total pot after taxes should you choose the cash option. The Power Ball lotto nets something like 35% of the total pot after taxes. Play the Mega Millions instead.
And those folks could still lose to the JG Wentworths of the world ("I want my $ and I need it now")...you know, those companies that trade annuitized payments for lump sums for a huge cut because there are folks who can't control their coke/fur/gambling/hooker/party habits.
I'm pretty sure the lump sum is determined by calculating the present value of the annual payments at a fixed rate. I think most financial advisers would say you could make more money by investing the lump sum than by receiving the annual payments. You should also probably be concerned about inflation, taxes, the stability of the currency, and your age.
Always wondered about this. What if they just ran out of money or something then your screwed. Also, what if you die? Do they continue paying onto your family? I'm sorry, but a lump sum, you get less, I know, but nothing is guaranteed in life. So after all is said, I will still have more money then started with.
Lump sum, then safe investments. The annual yield would pay for: National Free Boob Job day. Prospective women would need to be fit and under the age of...let's say 40, to be generous. A beautification project that would benefit all.
