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Anonymous
Anonymous asked in Games & RecreationGambling · 3 months ago

Lump sum or annuity ?

If you won the lottery for not a huge amount let’s say $2 million would you take the lump sum or annuity. In the state I live in the lump sum would be $816,500 or $80,000 per year for 25 years for $1,420,000. Giving up $603,000 seems like a lot to take the lump unless you dont expect to live the 25 years 

9 Answers

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  • 2 months ago

    The lump should be more than 816K, given tax rates. That doesn't sound right.

    80K x 25 is 2 million, not 1.42 million

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  • Willie
    Lv 7
    2 months ago

    I would take the lump sum. Divide up the money between myself and my wife, and three adult children.

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  • 2 months ago

    I would lean toward the lump sum, but I'd hire a team of advisors to help me analyze the options before making a final decision.

    The lump sum is determined by calculating the present value of the future payments.

    In very simple terms - you take each future payment you'd get with the annuity, and ask how much money you have to have in the bank today so that it will grow to the amount you'd get in the future by that date.

    So how much do I need now, to grow it into $80k by the 2nd year?

    And how much to I need now, to grow into $80k by the 3rd year?

    And so on for all 25 years of payments. then add up the totals.

    To do this, you have to make an assumption about the interest rate you would earn. Most of the time, for annuities like this they use relatively conservative estimates for interest. If you can earn a higher rate of return than what they use for the calculation, then you come out ahead by taking the lump sum.

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  • Jay P
    Lv 7
    2 months ago

    It's a moot question to begin with as the odds of actually hitting a multi million dollar jackpot are virtually nil in the first place.

    But, lets say I did win.  Since I live in Canada, lottery wins are not taxed and you get the whole amount after your win is confirmed.  There are no annuity options to think about.

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  • 3 months ago

    Math NOT withstanding (as your end numbers don't properly add up, unless your withhold some taxes)...  Lottery commissions provide all the funds that were received & accumulated at the time of the lottery drawing (less the 25% that's automatically withheld for taxes).

    With the annuity option, the funds receive & accumulated by the lottery commission is used to purchase the annuity of the noted jackpot amount.  HOWEVER, the annuity payments are NOT evenly paid, as the first payment is usually HALF of the average payment & increase every year, with the last payment being potentially over DOUBLE the average to reach the annuity total.  While the annuity will still have 25% automatically withheld for taxes, it's going to be based on that year's payout.

    As for the choice on the payment method, it ultimately depends on how long you expect to live & how well you manage your finances.  If you're young & a bit reckless with money, going with the annuity will be the wiser option.  If you're older & have some experienced money managers lined up, you might be better with the lump sum.

    It all depends on your situation, so it's best to consult your financial advisors (which should include a lawyer) on how you should proceed IF you have the winning ticket.

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  • 3 months ago

    I am having a little problem because I don't know how you came up with the numbers $1,420,000 and $603,000, so I am going to ignore them and only going to compare a lump sum of $816,500 to $80,000 per year for 25 years.

    First if you take the lump sum you will have to pay up to 37% federal income tax on that amount (depending upon your other income) so the amount you receive could be as low as $1,260,000 after taxes. (Federal taxes would probably be less than that but you might also have state and local income taxes to pay.)If you took the annuity the percentage you would pay if federal income tax would almost certainly be lower, but how much lower is difficult to guess. 

    The big advantage of the lump sum payment is that you can invest most of the money you receive. That investment will grow over time and, if held for over a year, any profits from the investments will be taxed as long term capital gains at a much lower rate. 

    Essentially it amounts to a question of would you rather invest your money in an annuity, or would you rather invest in elsewhere and probably get a better return on your investment, but accept the risk associate with picking your investments yourself.

    Either choice is rational, but most financial professionals recommend taking the lump sum. 

    Another important consideration is inflation. It is quite possible that $80,000 25 years from now will only buy as much as $40,000 will but today. It could be even less if inflation accelerates, which a significant people expect to happen. For example, it would take $2,77 in 1985 to buy what only cost $1.00 in 1970.

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  • A.J.
    Lv 7
    3 months ago

    You are not clear or trying to compare different numbers.

    The $816,500 is after tax withholding and $80K for 25 years is before taxes.

    You cannot assume $1.42 million sum since tax rates change.

    I don't even know that the $816,500 is correct.

    $80,000.00 per year for 25 years has an approximate pre-tax current value of $1,186,257 based on a reasonable 4.5% APR net present value

    At 3% $1,393,052

    At 5% $1,127,516

    I would have to look at the details more. When they show the lump sum after tax, they use withholding and not actual tax.

    Taxes are much higher on lump sums, but money declines in value over time.

    I would not likely take $816K.

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  • 3 months ago

    There's a BIG problem with your math. If you are given $80k a year for 25 years, you have received $2 million, not $1,420,000 - and that's without any return on investing that money. So that $80k can't be correct.

    If you took the $816,500 and invested it at an annual rate of return after taxes of 6% - and never spent a penny - you would have $3,504,000 after 25 years. I can't do an accurate comparison without an accurate yearly payout, and $80k a year isn't accurate.

    • A.J.
      Lv 7
      3 months agoReport

      80K x 20 = 1.6M  80k x 5 = 400K.It is 2 million

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  • Bill
    Lv 6
    3 months ago

    take the annuity as it is a guaranteed income for 25 years and still allows you to work for cash in hand and not report the extra income

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