Win Powerball Lottery. Take the 30 year payout

Lotteries are not guaranteed to be solvent 15,25 years from now, seems a significant risk to,presume they are. Lotteries already have a history (Illinois, others) of suspending payments during budget crises.

There's no 'lottery reinsurance co' I am aware of, nor any federal program to step in

Part of your reason for taking it now is you feel the lottery may go bankrupt or you'd die or people would badger you if you got anuitties.

What if there was ZERO CHANCE of that happening?

At that point aren't you only taking the lump sum because you want more money?

You don't even want to spend more money, you just want to have more money.

$336 Million after taxes for the lump sum

The annuity is put in escrow for the multistate lottery. It's as safe as in the bank. The state lottery, like Illinois, is run by the government and those crooks took the money out for other things

If you die, you had selected someone to receive the payout.

The annuity is worse than calculated above. They changed it about 5 years ago. The payout the first year is smaller that the payout the last year. To account for inflation, the last payout is almost twice as big as the first. Like $17 millions the first year and $34 million the last.

Lastly, the lottery is racist because only black people play when its $40 million, then white people win the money when it's a big jackpot.

200 million dollars is a lot of money to have laying around not earning any interest over 35 years. At least stick some of that in something low risk for a while. Although I suppose the average lottery winner doesn't know jacksh*t about handling money.

X-Runner wrote:

...... And you could easily die before getting all of the payments. I don't believe the future payments can be transferred to your estate.

What happens to an annuity prize if the winner dies?

"If a jackpot winner dies before receiving all annual installments, the balance of the prize will be paid to the winner's estate. Upon receipt of a court order, annual prize payments will continue to be paid to the winner's heirs. Other provisions may also apply depending on the laws of the lottery paying the prize."

Source:

Yes, now that I see that annuity payments continue even if you die then I am even more convinced that it's better for most to take the Annuity when the pot is very large.

Imagine this:

What if instead of getting a salary or bi-weekly pay for everyone, all Americans received 30 years worth of salary upfront discounted at 4% or so.

And then they received no payments again for 30 years but still had to work.

What would the country look like in 20 years?

Would the economy be humming along smoothly because of all the investments or would it more resemble a dumpster fire?

Lottery winners of this magnitude will find themselves in the highest Federal tax bracket no matter whether they take the lump-sum or 29-year annuity. However, state income taxes vary widely across the country. I reside in a state with a marginal income tax rate of 6-7% at the highest bracket. If I took the lump-sum, I would pay that state tax on the full payment. If I took the annuity, I potentially have the ability to move to a low income tax state after receiving and paying tax on the initial payment.

How would I approach the decision?

First, let's ignore taxes and estimate the expected IRR of the annuity decision.

Option 1: Take the $480 million today

Option 2: Take the $758.7 million as a 30-installment annuity = $25.29 million/year

To estimate the IRR of the annuity using a business calculator, assuming you have the default settings that payments occur at the end of the year:

[FV] = 0

[PMT] = $25.29

[N] = 29 (the first payment is upfront today)

[PV] = -(480.0 - 25.29) = -454.71 (first payment is today)

[CPT] [I/Y] = 3.52%

So, the question to ask is whether 3.52% is adequate return in the current market environment for you. While this is not a "risk-free" annuity, lotteries are required to escrow the funds to guarantee future payments of the annuities, so theoretically, this is a low-risk investment.

The current yield on the 30-year treasury bond is 2.75%. One would need to consider whether the 77 basis points is adequate return to compensate for the level of risk present in the future payments.

For me, personally, I would lean toward taking the annuity. However, I would also shop around to see whether I could buy a better annuity in the market place that replicates even higher payments for the $454.71 million investment. You may have trouble finding an annuity company to take that much money from you, or a company that you trust will be around for 29 years though.

Now, about those taxes that we ignored. The ability to move residency to a low income tax state such as AZ or FL gives an added benefit of the annuity option for me personally, as I live in a moderately high income tax state. However, we also have to think about expectations for future Federal tax rates. Given the massive $19.97 trillion US government debt, do you think that future tax rates over the next 29 years will on average need to be higher or lower than they are currently? If you think Federal tax rates have to increase, then the lump-sum is the better option. If you think they stay roughly the same, then it is a wash. Lower future tax rates favor the annuity.

The other issue as others have noted is whether you can trust yourself to use the money wisely. It would be much easier in my opinion to manage the annuity payments than the big lump-sum. The annuity helps tie your hands a bit and keeps you from making stupid investment decisions, not to mention all of the leeches that will suddenly appear wanting a piece of the action.

Sure, the annuity might be a better decision for more people than the lump sum, but it wouldn't be the better decision for all, and certainly not for myself (or from the sounds of it, Flagpole).

X-Runner wrote:

Yes, now that I see that annuity payments continue even if you die then I am even more convinced that it's better for most to take the Annuity when the pot is very large.

Imagine this:

What if instead of getting a salary or bi-weekly pay for everyone, all Americans received 30 years worth of salary upfront discounted at 4% or so.

And then they received no payments again for 30 years but still had to work.

What would the country look like in 20 years?

Would the economy be humming along smoothly because of all the investments or would it more resemble a dumpster fire?

It would absolutely be a dumpster fire. A portion of the population would be broke very quickly, and others would be forced to help them. Once you have your money, you would be far less motivated to work hard or try to advance in your career.

Behavioral economics or psychology research has well documented that given a choice, people prefer to be compensated after they perform the work rather than up front. We engage in "mental budgeting" and try to match the pain of certain costs with the joy of consumption. If we are going on vacation, we prefer to save for the vacation in advance of the trip. Otherwise, you spend the next couple of years paying off debts from a trip that is already completed.

However, we don't mind financing other purchases such as appliances, cars, and houses, because while we are paying off these debts over time, we are also simultaneously using the asset and deriving value from it.

I don't have a source on this, but I think it came from Nofsinger's Investment Psychology text. There was a survey that asked, "In three months, you must work 10 hours of overtime. Would you prefer to be compensated today? Or compensated after the work is completed?" It turned out 66% said they wanted to wait for the payment (vs. 34% prefer pay upfront), even though the time value of money says payment now is better.

The same group was asked whether they would save $300/mo. for 6 months to pay for an $1800 vacation or finance it for 6 months afterwards. This time 60% say they would save.

It is human nature for us to seek out immediate gratification, but some peoplel are better at managing these impulses than others.

Worth noting that in addition to the other risks already mentioned re: the annuity option is the uncertainty risk about what tax rates will be over the next 30 years.

You should get the lumpsum and invest it in a high yield vehicle.

Bernie Madoff wrote:

You should get the lumpsum and invest it in a high yield vehicle.

You mean like a Bentley so you can get a lot of tail?

Flagpole wrote:

the real deal wrote:

200 million dollars is a lot of money to have laying around not earning any interest over 35 years. At least stick some of that in something low risk for a while. Although I suppose the average lottery winner doesn't know jacksh*t about handling money.

I was just being conservative (another reason I would never lose it all). Yes, it would be in a very liquid vehicle earning interest. Anything gained on that is just gravy...either allows you to spend more or give more or leave more to family when you pass.

I'm no multi million dollar lottery winner ever thought they would lose it all.

You are no different.

This is why she should only use 1) a CFP 2) who is fee-only and 3) hire a 2nd fee only CFP to audit the first guy/gal. I know probably 20-30 of the top CFPs in the US. None of them would have used a guy like Madeoff. His approach would have sent up too many red flags to an experienced financial professional.

Case in point, in 1986 I was invited to a presentation by a guy who getting great returns for his clients by trading in international currency spreads. I said nothing, but eventually someone asked me what I thought. I replied that I could not recommend his product/service to my clients because I couldn't independently verify his numbers and his claims that his arbitrage was "without risk" were misleading and inaccurate. He was later shut down for running a Ponzi scheme.

So YOU may find the right CFP.

But what should this woman who just won do?

Like I said, she will get solicitations from many.

Or she can google search for someone.

Maybe she should post on Letsrun for suggestions.

I'd bought Alan Webb a new fleet of hybrid vehicles.

And a lifetime supply of Omaha Steaks.

Glad I didn't win. Looks like it's not really worth it.

She made a big mistake by publically revealing her identity. Big mistake. I do hope that it works out for her in the end, but when winning the lottery, do not let people know who you are.

She'll be okay. She picked her own numbers and has

minimal family, God let her win for a reason.