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I don't understand lottery winners
Posted by: AllGold
Date: May 12, 2021 03:48PM
People never take the annuity. Always the lump sum.

In this case, a guy wins the $25,000 a Year for Life prize.

"He elected to receive the money as a one-time lump-sum payment of approximately $390,000 rather than annual payments of $25,000 for 20 years or life, whichever is greater."

“Winning this prize feels great. I am looking to retire soon, so this will help a lot,” Nash said.

Wouldn't a guaranteed extra $25K per year for life make retirement more comfortable? Plus, even if he dies early, he'd have a guaranteed half a million to will to his heirs.

[www.mlive.com]



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Re: I don't understand lottery winners
Posted by: mattkime
Date: May 12, 2021 03:52PM
You're right, but people who play the lotto typically aren't very good at math.



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Re: I don't understand lottery winners
Posted by: btfc
Date: May 12, 2021 03:53PM
With proper management and compounding, the State’s numbers can be beat.
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Re: I don't understand lottery winners
Posted by: N-OS X-tasy!
Date: May 12, 2021 03:58PM
Quote
btfc
With proper management and compounding, the State’s numbers can be beat.

This. Most people believe they can do better than the compounding that would occur if they leave the State to invest the money.

I suppose they may also be the fear that the State might somehow find a way to default on paying the money over such a long period of time.



It is what it is.
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Re: I don't understand lottery winners
Posted by: AllGold
Date: May 12, 2021 04:07PM
I always wondered if financial advisors all told people the annuity was too conservative and they could do better.

The grand prize for that lottery game is $1000/day for life (or 20 years whichever is greater). If you take the lump you get $5.75 million before taxes. I always figured taxes would take a big chunk of a lump sum.

For me, no matter what the financial advisor says, I think I would take the annuity on that ($1000/day). Then I wouldn't care at all about managing the money--and in what reality is $365K/year not enough money?







Edited 1 time(s). Last edit at 05/12/2021 04:07PM by AllGold.
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Re: I don't understand lottery winners
Posted by: space-time
Date: May 12, 2021 04:15PM
and in what reality is $365K/year not enough money?

When the reality that you have to pay for health insurance, retirement and college hits, then you realize you need more.
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Re: I don't understand lottery winners
Posted by: N-OS X-tasy!
Date: May 12, 2021 04:24PM
Quote
AllGold
I always wondered if financial advisors all told people the annuity was too conservative and they could do better.

The grand prize for that lottery game is $1000/day for life (or 20 years whichever is greater). If you take the lump you get $5.75 million before taxes. I always figured taxes would take a big chunk of a lump sum.

For me, no matter what the financial advisor says, I think I would take the annuity on that ($1000/day). Then I wouldn't care at all about managing the money--and in what reality is $365K/year not enough money?

And don't kid yourself - taxes would also take a similar percentage of an annuity.



It is what it is.
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Re: I don't understand lottery winners
Posted by: btfc
Date: May 12, 2021 04:25PM
“ I wouldn't care at all about managing the money “


Absolutely worth considering. What is your knowledge, interest, tolerance for risk and stress.
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Re: I don't understand lottery winners
Posted by: AllGold
Date: May 12, 2021 04:26PM
Quote
space-time
and in what reality is $365K/year not enough money?

When the reality that you have to pay for health insurance, retirement and college hits, then you realize you need more.

Why do you need to pay for retirement when you're guaranteed to receive $365K annually for as long as you live?



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Re: I don't understand lottery winners
Posted by: Marc Anthony
Date: May 12, 2021 05:17PM
I would've taken the lump sum, as well, because there's no guarantee what "life" may mean. Alanis Morrissette's song "Ironic" features a person that wins the lottery and then dies the next day. The guy in question is 57 and his risk for mortality is significant over the next 20 years.



Le poète doit vivre beaucoup, vivre dans tous les sens. - Verlaine
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Re: I don't understand lottery winners
Posted by: AllGold
Date: May 12, 2021 05:30PM
Quote
Marc Anthony
I would've taken the lump sum, as well, because there's no guarantee what "life" may mean. Alanis Morrissette's song "Ironic" features a person that wins the lottery and then dies the next day. The guy in question is 57 and his risk for mortality is significant over the next 20 years.

And with the annuity he's guaranteed to get at least 20 years worth ($500K) of payments.



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Re: I don't understand lottery winners
Posted by: C(-)ris
Date: May 12, 2021 05:43PM
Quote
AllGold
Quote
Marc Anthony
I would've taken the lump sum, as well, because there's no guarantee what "life" may mean. Alanis Morrissette's song "Ironic" features a person that wins the lottery and then dies the next day. The guy in question is 57 and his risk for mortality is significant over the next 20 years.

And with the annuity he's guaranteed to get at least 20 years worth ($500K) of payments.

I'd still take the lump sum. I don't trust the government to hold up their end of the bargain.



C(-)ris
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Throwback Thursday Signature:
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Re: I don't understand lottery winners
Posted by: SDGuy
Date: May 12, 2021 05:50PM
Quote
C(-)ris
I'd still take the lump sum. I don't trust the government to hold up their end of the bargain.

agree smiley
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Re: I don't understand lottery winners
Posted by: anonymouse1
Date: May 12, 2021 06:22PM
Let's play that out:

call it $50K/year for house payment--that's enough to buy a decent house almost anywhere except high-end NY/SF/LA etc.

Two kids in college at the same time @$50K each = $100K

Health insurance = $35K

Adding those up, I get $185K. That leaves$180K, enough to cover taxes and living expenses, I'd guess.


Quote
space-time
and in what reality is $365K/year not enough money?

When the reality that you have to pay for health insurance, retirement and college hits, then you realize you need more.
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Re: I don't understand lottery winners
Posted by: modelamac
Date: May 12, 2021 06:38PM
That doesn't make sense. How does retirement figure in to this equation? You are getting a grand every day for the rest of your life. Your tax bill will change. Your source of health insurance doesn't change because of that. Your retirement funds don't disappear because of that.

Quote
space-time
and in what reality is $365K/year not enough money?

When the reality that you have to pay for health insurance, retirement and college hits, then you realize you need more.



Ed (modelamac)

I think I will just put an OUT OF ORDER
sticker on my head and call it a day.
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Re: I don't understand lottery winners
Posted by: btfc
Date: May 12, 2021 06:40PM
Quote
N-OS X-tasy!
Quote
AllGold
I always wondered if financial advisors all told people the annuity was too conservative and they could do better.

The grand prize for that lottery game is $1000/day for life (or 20 years whichever is greater). If you take the lump you get $5.75 million before taxes. I always figured taxes would take a big chunk of a lump sum.

For me, no matter what the financial advisor says, I think I would take the annuity on that ($1000/day). Then I wouldn't care at all about managing the money--and in what reality is $365K/year not enough money?

And don't kid yourself - taxes would also take a similar percentage of an annuity.


So I’ll make things simple math wise and do some quick calculations.

1000/day x 20 years = 7,300,000.

$5.75 million, let’s say 3 mil after tax and spending spree.

(Possibly less because NY, possibly more in a low/no income tax state.)


So 3 mil, if you can make “10% a year” (I’ve been making about 16-24% for roughly the last 10 years from investments and my real estate value is up by 200%) with compound interest you’d end up with about 20 mil.



Edited 1 time(s). Last edit at 05/12/2021 06:41PM by btfc.
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Re: I don't understand lottery winners
Posted by: Gareth
Date: May 12, 2021 06:52PM
Quote
btfc
So 3 mil, if you can make “10% a year” (I’ve been making about 16-24% for roughly the last 10 years from investments and my real estate value is up by 200%) with compound interest you’d end up with about 20 mil.

But you're assuming one doesn't actually want to spend anything else over that 20 years? If one wanted to "draw" the 365k from lump sum every year, and they were making "10% a year", it looks like they'd run out of money after 15 years. One will have turned "3 mil" into 5.2 mil doing this, but still be out of money at the end.
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Re: I don't understand lottery winners
Posted by: btfc
Date: May 12, 2021 08:17PM
OK so some more quick math.

If you held back 2% of the 10% interest, that would leave you $60,000 to spend year one, and that amount would go up every year due to compounding, (roughly $70,000 year 2) and in 20 years your principal would be 14 mil.

4% would let you spend 120,000 (increasing each year - about $125,000 year two, and so on, and roughly 400,000 year 20) and your end principal would be a little less than $10 mil.

Or you could spend all the 10% interest (300,000) every year and end up with $3 mil.



Edited 5 time(s). Last edit at 05/12/2021 09:01PM by btfc.
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Re: I don't understand lottery winners
Posted by: Bill in NC
Date: May 13, 2021 06:36AM
Annuities on lottery wins are usually guaranteed for 20 years...best for those with family to take the annuity & buy a large term life insurance policy as well.



Edited 1 time(s). Last edit at 05/13/2021 06:37AM by Bill in NC.
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Re: I don't understand lottery winners
Posted by: Mr645
Date: May 13, 2021 06:40AM
IN almost every case it's better to take the lump sum as you can earn more on the sum than you would receive with the annuity. Also inflations really takes a bite out of the 20 or 30 yr payments
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Re: I don't understand lottery winners
Posted by: macphanatic
Date: May 13, 2021 07:21AM
Is the guaranteed payout period transferrable to survivors? In many cases it isn't. This is one of the key reasons to take the lump sum. One then hires a good financial planner to minimize tax liabilities and create an investment strategy.
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Re: I don't understand lottery winners
Posted by: Forrest
Date: May 13, 2021 09:24AM
Taking the Annuity is the smart move. Most take the lump sum and are broke in 3-5 years according to CNBC
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Re: I don't understand lottery winners
Posted by: RAMd®d
Date: May 13, 2021 09:29AM
And don't kid yourself - taxes would also take a similar percentage of an annuity.


This.

Since Lotteries advertise huge potential winnings, and fine print the lump sum payout reductions, they could at least make the annuities tax free, for both state and federal taxes.



IN almost every case it's better to take the lump sum as you can earn more on the sum than you would receive with the annuity. Also inflations really takes a bite out of the 20 or 30 yr payments

I'd say it's potentially better, not being sure how easy it is to find a financial manager who could make the lump sum a profit maker and not rely on the radio ads' quick '...no guarantee of performance' escape clause.



Is the guaranteed payout period transferrable to survivors? In many cases it isn't.


I've always wondered about that.

Not being able to will it to whoever one wants is a literal (or near literal) cash-grab.

That and not trusting the government so suddenly change some rule, along with age, make even the risk of squandering a lump sum worth that risk.

But for this to be a problem, one has to win, and to win, one has to play, so I'll forever be on the sidelines of sudden, unexpected major financial enrichment and the pain and suffering it would be sure to bring.





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Re: I don't understand lottery winners
Posted by: datbeme
Date: May 13, 2021 11:41AM
Depends entirely upon how much you need to dip into the principal in the early years. This is obviously where a lot of people screw up, but that doesn't mean the annuity makes sense for everyone. Imagine doing this 10 years ago. Or worse, taking the lump some and spending it 10 years ago.

Definitely more secure and probably the right choice for people who can't preserve the principal, but you pay for that security.
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Re: I don't understand lottery winners
Posted by: jdc
Date: May 14, 2021 03:21AM
$4000 a month house mortgage isnt a lot.... if you are a "lottery winner"

$2 M on a home will get you a $10000 mo bill.

$2 M might sound like a lot, but its not...2 M homes can be found just about everywhere.



----


Edited 999 time(s). Last edit at 12:08PM by jdc.
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Re: I don't understand lottery winners
Posted by: AllGold
Date: May 14, 2021 02:08PM
Quote
jdc
$4000 a month house mortgage isnt a lot.... if you are a "lottery winner"

$2 M on a home will get you a $10000 mo bill.

$2 M might sound like a lot, but its not...2 M homes can be found just about everywhere.

You buy a $2 million house if you win a big lottery prize ($50M+) but not if you win a small prize like ~$5M--or in this case $390K before taxes. That $25K/year for life win isn't a life-changing amount of money, it just makes you more comfortable in the lifestyle you already have.



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Re: I don't understand lottery winners
Posted by: Bill in NC
Date: May 18, 2021 08:45AM
Quote
Mr645
IN almost every case it's better to take the lump sum as you can earn more on the sum than you would receive with the annuity. Also inflations really takes a bite out of the 20 or 30 yr payments

You're ignoring risk.

For an annuitant, the annuity payments off a lottery win are risk-free with a return far higher than that same person choosing a lump-sum could receive, risk-free, in today's market.

And again, annuity payments from lottery wins are usually guaranteed for a set term, though I'd still buy a hefty term policy as well, owned by my heirs, not me, as backup.

As others have pointed out statistically those taking lump sums end up squandering them.

Look at jack Whittaker...working full-time by his teens, built a successful business from scratch, worth over $10 million before he won, still came apart at the seams after taking the lump sum.



Edited 1 time(s). Last edit at 05/18/2021 08:45AM by Bill in NC.
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