Mega Millions @ $330M... take the annual payout or the cash option?

[MRoberts]

I'd take the lump sum. Because I read somewhere that if you die, it's gone.

I think the more difficult thing would be to manage your life with that much wealth, and find someone you trust to manage it.

I would tell nobody but my wife. Not even my parents. If anyone asked, I'd chalk it up to investments or my career. The more people that know, the more problems you'd have.

The problem with the internet is it is so easy to spread mis-information because people say "I read this somewhere" and don't bother to think of WHERE they read it...when that place is usually some crappy blog.

I have done research on lotteries, and while I didn't do ALL states, I never came across ANY that stopped annual payments upon death. They all (and definitely including Mega Millions and Powerball) continue to pay out to your estate upon death. Even most "Win for Life" payouts have a minimum payout so if the winner dies of shock right after redeeming the winning ticket the estate gets something. For example, NY's $1000 a week for life pays out at least $1 million over 20 years.

As for which would you take, well..OBVIOUSLY you would take the lump sum with the interest rates at historic lows. The way they pay out lottery winnings is they invest some amount that would cover the annuity payments. So..if you won a jackpot of $250 million, they would invest whatever it would take to pay you $10 million a year for the next 25 years. That amount iss what they pay out as the lump sum for those who take the lump sum. (Which these days is something like 90% of players.) The lower the interest rate at the time of the investment, the more they have to invest, and therefore the higher the lump lump.

Since we are at historically low interest rates, the lump sum percentage is the highest it has ever been, and likely will ever be again. Chances are, interest rates will rise over the next 25 years and will average considerably higher than they are now. So even simple, low risk investments would likely result in a higher expected value for people taking the lump sum.

I started doing this research about 12 years ago when interest rates were extremely high. At that time, the lump sum value was something like 45-50% of the advertised jackpot. Before taxes. Compared to today where it is around 70%. (This will vary from game to game as some games have 25 equal payments, while others have 30 years, and still others like NY state have a ridiculous 30 or more year payout, with a backended payout system. This greatly decreases the lump sum amount.) But even then, with a halfway decent investment portfolio, you are almost certain to get a better return on the investment of the lump sum than the government would.

[MRoberts]

Thanks for this. so is it fair to say lump sum vs annual payments, it's net $262M vs net $319M? (yes, I am assuming the tax rate stays the same, and it's only going to increase if it changes at all, so all the more reason to take lumpsum).

No...it is $319 million spread out over 25 years versus $262 million now. Plug that into a simple Present Worth formula and you will find that you would have to average just 1.6% in interest per year over that same time for your lump sum payout to produce more. By that I mean, if you took the entire lump sump and invested it at just 1.6% interest, you could pay yourself that same $12 million a year for 26 years before it would be all gone.

If you could get just a 3% return on your investment (very easy to do) you could pay yourself $15 million a year for 26 years for a total of $390 million. And at a more realistic (but still on the low side) 5.25%, you could pay yourself $19 million a year for 26 years and your total payout to yourself would be close to $500 million.

[onlyrp]

So..if you won a jackpot of $250 million, they would invest whatever it would take to pay you $10 million a year for the next 25 years. That amount iss what they pay out as the lump sum for those who take the lump sum. (Which these days is something like 90% of players.) The lower the interest rate at the time of the investment, the more they have to invest, and therefore the higher the lump lump.

Wait, what? The lower the interest rate, the higher they'll pay upfront?

Since we are at historically low interest rates, the lump sum percentage is the highest it has ever been, and likely will ever be again.

So you mean to say, if you invested in the same places they did, you'd lose no money taking it in lump sum or in annual payments?

Chances are, interest rates will rise over the next 25 years and will average considerably higher than they are now. So even simple, low risk investments would likely result in a higher expected value for people taking the lump sum.

Ok, you confused me again. If now is lowest interest rates and it'll only rise later (for sake of argument, assume this is a certainty), why would they payers want to give a high lump sum when they can give a lower lump sum? Or, would that mean annual payments would be higher than current estimations if interest rates increase?

I started doing this research about 12 years ago when interest rates were extremely high. At that time, the lump sum value was something like 45-50% of the ad
vertised jackpot. Before taxes. Compared to today where it is around 70%. (This will vary from game to game as some games have 25 equal payments, while others have 30 years, and still others like NY state have a ridiculous 30 or more year payout, with a backended payout system. This greatly decreases the lump sum amount.) But even then, with a halfway decent investment portfolio, you are almost certain to get a better return on the investment of the lump sum than the government would.

Help me here. By your research, is the highest ever lump sum 70% of advertised jackpot, pre-tax?
After taxes, assuming the winner does not invest anything.
What is the total difference of lump sum vs annual payments when paid off?
In other words, assume the winner does not invest any of his won money, how much monetarily does he lose, or gain, by taking lump sum vs annual payments, after taxes in each case?

[onlyrp]

No...it is $319 million spread out over 25 years versus $262 million now.

Yeah. That's what I said.

Plug that into a simple Present Worth formula and you will find that you would have to average just 1.6% in interest per year over that same time for your lump sum payout to produce more. By that I mean, if you took the entire lump sump and invested it at just 1.6% interest, you could pay yourself that same $12 million a year for 26 years before it would be all gone.

In other words, you're only "earning" 1.6% a year by letting them hold your money? Or more explicitly, you only lose 18% by taking your money 25 years in advance? No brainer.

If you could get just a 3% return on your investment (very easy to do) you could pay yourself $15 million a year for 26 years for a total of $390 million. And at a more realistic (but still on the low side) 5.25%, you could pay yourself $19 million a year for 26 years and your total payout to yourself would be close to $500 million.

Which is why I asked if those were the right numbers. Seems like a no brainer.