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If You Had Won Powerball, Would You Take The Lump Sum Or Annual Payouts?  Rate Topic 
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 Posted: Tue May 21st, 2013 01:08 am
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Ultimark



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srossi wrote:
Quattro wrote: dogfacedgremlin34 wrote:
Well, it really depends on how accurate your numbers are.  The two main variables involved are estimated tax rate and potential rate of return.  Using a Present Value of Annuities calculation with your numbers, $12.4M/year over the course of 30 years is the equivalent of $373.2M lump sum today, assuming 0% annual growth.  With that in mind, you'd be better off taking the $375M, since 375>373.2. You would need to get $12.5M/annum for 30 years to be the equivalent of $375M at 0% growth.

That said, I notice you're using taxation of about 36.5%.  I'm not sure how taxes work on this sort of thing, but that seems kind of high to me.  I would imagine any accountant worth his salt should be able help you retain more than that.  If we bump the taxation rate down to, say, 33%, that gives you about $13.2M/yr to play with.  Over the course of time, that's the equivalent of $396M lump sum today, assuming 0% annual growth.  Using these numbers, you'd be better off taking the annuity, since 396>375.

In both the examples above, I used 0% growth.  Anybody should be able to get growth though--worst case scenario, even if you're laddering your dough incrementally in a CD, you can probably pull 1-1.5% if you shop around--and keep in mind, rates are at all time lows at the moment.  They're only going to go up in the future.  It may not be next month or next year--in fact it probably won't be for another couple years, minimum--but eventually they will go up.

Anyway, using a 1% growth and going back to your original $12.4M annuity, the present value of the annuity is the equivalent of about $321M.  Using my $13.2M example with 1% growth, the equivalent would be in the neighborhood of $340M.  In both these examples, you'd be better off taking the lump sum assuming a 1% annual growth.

Now let's say you have a really great accountant and somehow he's able to get you an overall tax rate of 25%.  That would mean your annuity would be around $14.76M.  With that annuity and a 1% annual growth rate, the present value of your annuity is suddenly $381M.  You'd be better off taking the annuity, since 381>375.   

So what does all this mean?  Well, if any one of us ever is fortunate enough to have to make this decision, find yourself a great accountant and a great financial planner.  They should be able to maximize your retained earnings.  But in general, if your $375M lump/$12.44M annual annuity numbers are accurate, you'd be better off taking the lump sum if you think you can get any type of return at all on it.


You are only considering today's tax rate. Everyone's assumption is taxes will have to rise in the future due to the nation's financial situation. Therefore, those future payments will be taxed at higher and higher rates. The uncertainty of that fact alone means one answer - take the lump sum.

Taxes only go in one direction.  Besides, unless you're an undisciplined moron the level of Ric Flair or a boxer, you can do about as well or better yourself if you take the lump sum and invest most of it.  There's no need to take basically an allowance unless you think you're gonna blow it all quickly.


Allen Iverson could blow through it but he is a special case.

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 Posted: Tue May 21st, 2013 04:26 am
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LarrySC



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Married Jo wrote:
Stupid phone..

First thing that you need to buy would be a new phone!

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 Posted: Tue May 21st, 2013 05:18 am
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Benlen



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Lump sum. If I was under 30 yrs old I would consider taking the annual payments.



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 Posted: Tue May 21st, 2013 11:44 am
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dogfacedgremlin34
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srossi wrote:
Quattro wrote: dogfacedgremlin34 wrote:
Well, it really depends on how accurate your numbers are.  The two main variables involved are estimated tax rate and potential rate of return.  Using a Present Value of Annuities calculation with your numbers, $12.4M/year over the course of 30 years is the equivalent of $373.2M lump sum today, assuming 0% annual growth.  With that in mind, you'd be better off taking the $375M, since 375>373.2. You would need to get $12.5M/annum for 30 years to be the equivalent of $375M at 0% growth.

That said, I notice you're using taxation of about 36.5%.  I'm not sure how taxes work on this sort of thing, but that seems kind of high to me.  I would imagine any accountant worth his salt should be able help you retain more than that.  If we bump the taxation rate down to, say, 33%, that gives you about $13.2M/yr to play with.  Over the course of time, that's the equivalent of $396M lump sum today, assuming 0% annual growth.  Using these numbers, you'd be better off taking the annuity, since 396>375.

In both the examples above, I used 0% growth.  Anybody should be able to get growth though--worst case scenario, even if you're laddering your dough incrementally in a CD, you can probably pull 1-1.5% if you shop around--and keep in mind, rates are at all time lows at the moment.  They're only going to go up in the future.  It may not be next month or next year--in fact it probably won't be for another couple years, minimum--but eventually they will go up.

Anyway, using a 1% growth and going back to your original $12.4M annuity, the present value of the annuity is the equivalent of about $321M.  Using my $13.2M example with 1% growth, the equivalent would be in the neighborhood of $340M.  In both these examples, you'd be better off taking the lump sum assuming a 1% annual growth.

Now let's say you have a really great accountant and somehow he's able to get you an overall tax rate of 25%.  That would mean your annuity would be around $14.76M.  With that annuity and a 1% annual growth rate, the present value of your annuity is suddenly $381M.  You'd be better off taking the annuity, since 381>375.   

So what does all this mean?  Well, if any one of us ever is fortunate enough to have to make this decision, find yourself a great accountant and a great financial planner.  They should be able to maximize your retained earnings.  But in general, if your $375M lump/$12.44M annual annuity numbers are accurate, you'd be better off taking the lump sum if you think you can get any type of return at all on it.


You are only considering today's tax rate. Everyone's assumption is taxes will have to rise in the future due to the nation's financial situation. Therefore, those future payments will be taxed at higher and higher rates. The uncertainty of that fact alone means one answer - take the lump sum.

Taxes only go in one direction.  Besides, unless you're an undisciplined moron the level of Ric Flair or a boxer, you can do about as well or better yourself if you take the lump sum and invest most of it.  There's no need to take basically an allowance unless you think you're gonna blow it all quickly.

But the tax variable will be taken out of the equation if I understand correctly. My understanding is that they tax everything up front, and then your annuity is the net amount. If that's the case, it makes determining what to do a helluva lot easier.

Everybody's saying "take the lump sum, take the lump sum, anything else is stupid!" but simple math proves this just isn't true. There's other factors to consider, including what your own personal goals are. Beej is afraid his money would outlive him, so he'd take the lump sum. Fair enough. But others might have children or a family to take care of or, as somebody already mentioned, be afraid they'd blow through it in a year like so many other lottery winners.

Point is, a self imposed allowance might not be the worst thing in the world when other factors--not the least of which is the time value of money--are considered.

Last edited on Tue May 21st, 2013 11:45 am by dogfacedgremlin34



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 Posted: Tue May 21st, 2013 02:33 pm
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yellowdog



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if I was under 30 I'd probably take it over time.  I'm not under 30.  Give it to me now.



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 Posted: Tue May 21st, 2013 05:43 pm
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LarrySC wrote:
Married Jo wrote:
Stupid phone..

First thing that you need to buy would be a new phone!


Second would be WebTV.



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 Posted: Tue May 21st, 2013 11:37 pm
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Principal_Raditch



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I'd do the lump sum for a few reasons.

Inflation. If you take the money over time, you're unsure of the how that's going to be affected by an inflation rate that might vary significantly over 30 years.

Investment growth. Maybe if I was a jabroni investor who was content to stick my funds into a 30 year bond netting 4% a year I'd look towards a longer term payout. But I would be confident in getting significantly higher returns on that lump sum going forward.

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 Posted: Wed May 22nd, 2013 12:36 am
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The Hammer



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BayouBoogie wrote:
clawmaster wrote:
beejmi wrote:
I'd go lump sum. 30 years of payments sounds great but I'd be surprised if I lived 30 more years.


This.


Give me as much of it as I can get right now.




This!! With my medical history I want it now.



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 Posted: Wed May 29th, 2013 02:34 am
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sportatorium roach



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Lump sum.
I'm 36, so in other words, I could die of a heart attack in 5-10 years or I could live another healthy fifty years.

Last edited on Wed May 29th, 2013 02:35 am by sportatorium roach

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