How is the calculation ok? He wrote "Punching a few numbers into my calculator, I find that if we start with a cash value of $500,000 and expect to wind up with $1,000,000 after 20 years (in other words, the equivalent of a $50,000 annuity), the underlying annual interest rate has to be 8.92%." 8.92% of $500k is $44,600. Even if we don't compound the interest, you multiply $44,600 by 20 and you get $892k. So clearly you're already above the $1m goal with that interest rate. If you're arguing about annual payments or lump sum, that's a different argument. There's no way his statement above is correct. His calculations are wrong.
His wording was wrong. He was arguing lump sum vs annual payments -- that's the whole point of his article. Since the annual payments start in yr1 -- they're not withheld until yr 20 -- his statement of $1m in 20 yrs being the equivalent of $50K annually was simply very poorly worded. Interpreted as it's worded it misses time value of yr's 1 through 19. And it's not what he meant. He had to have meant the $50K/y aggregate to $1m over 20 yrs -- not that $1m is the future value of 20 yrs of payments. The effective return of his example was about 8.9%. In this example, I take the annual payments. (assuming I preselected and bothered with the calculations first ). And assuming payments continue after death....Practically, I select lump sum by default. And am OK with it -- even if a $1m win turns out to be $350K cash money.
I understand that you get the $50k annually and you can start investing that right away, adding $50k more to it each year as you get your money from the lottery commission. If you don't touch the money at all, the math says it's the right way to go. Where are you coming up with the 8.9% though? How is that getting calculated? If you're comparing investing of the $50k annually to the $500k upfront, it would seem it would have to be a comparison of percentages. For example, if you got $50k annually and you reinvested all of that for 20 years at 1% it would be equivalent to getting $500k upfront and reinvesting for 20 years at 4.3%. A percentage like 8.9% would have to be compared to something else, right? Or am I missing something?
...then I would retire and never work a day (at an official job) again in my life. I've seen other people win the lottery and say they will still keep their jobs going on as usual. I'll take the approach of the one family who won...managing my lottery money winnings will be my new, fulltime job.
8.9% is simply computing the rate of return. An outflow of $500K (what you give up) in yr 1 exchanged for 20 annual inflows of $50K at the beginning of each yr. I plugged the numbers into Excel and it came to 8.9%. I don't know how that compares to the yield you'd get on a 20yr California bond (which is really what you're getting). Fun with math. I've yet to face this dilemma -- though thanks to cf.net -- I'm now prepared! (and the article guy needs to hire an editor with his winnings -- because his wording of the math was way off).
I don't know about that, but the small print says "If you live in Arkansas, Love the Rockets, and are a fan of the Philly Eagles, you are not elligible to win, Señor Pun." Read it. It's there in FINE print.
Sorry. I'm dense. Can you break that down a little more for me what the 8.9% is? It's the rate of return you would need on the $500k to equal something on the $50k annually?
I still don't get it. Take $50k and compound interest it over 20 years and you get something like $275k. If you're adding $50k a year on top of that, it goes way over a million. I don't see how it equates anything to $500k.
It should equate to $2.75m -- which is the Future Value of $500K 20 yrs out. Or if you discount each 50K payment, then the sum of those payments will equal $500K (ie Yr 1 - $50K; Yr 2 - $46K etc) Just take the lump sum and be done with it. Send a little Clutch's way, and enjoy the rest. Get investment advise though -- before buying any annuities .
