You just won the lottery! Annuity or lump sum?

I would have to sit down and work out what would happen with taxation!

I'd do the math then get back to you

If I can invest that $1.2m wisely, I may eventually end up with the $100k/yr anyway...

This has after-tax earnings equivalent to those of an 11.8% taxable annuity. There's no way it is reasonable to expect any other investment to make that kind of money over the long haul. I take the annuity.

I think it's pretty lame that the lottery folks get to call it a $3 million jackpot, though.

ILJ: the problem is, you're not investing $1.2m to get $100k, you're investing $1.2m less taxes to get $100k. That's much more difficult.

The 1.2 million

I'd take the annuity because our taxes would be absolutely horrendous if we took the $1.2 million. We already have a bad tax year coming up due to my husband's job change. He received a great package from his previous employer. We also have to take his deferred income this year. Finally, my father-in-law recently died and we will be receiving another chunk of cash.

phi: Well, I was thinking about building it up to that level, but you're basically right; that would require some pretty darn fine financial planning. The annuity is looking better...

I don't know what to do with 1.2 million, but I do know what to do with 100,000.

Take the $1.2M, invest.

It depends on where I win it.

$100,000 ANNUALLY

Lump sum

annuity

I'd always assumed that it was better to take it now. Turns out that a simple spreadsheet showed me it's not quite so clearcut. Assuming a 50% tax rate on money received (either the lump sum or the annuity) and you're just investing all the money, the answer changes slightly depending on the return on investment. At the end of 30 years with a 10% annual return, the annuity gives you about $9M and the lump sum about $10.5M. At 7%, the annuity gives you about $5M and the lump sum about $4.5M. They just not that different at the end though the lump sum means you have more money in the meantime.

My temptation is to just follow phi's tax advice- he's got pretty sound thinking on this. But I read dab's answer and realized that the difference between phi's planning and mine is that phi always plans assuming that he is going to live into his 70s or 80's whereas I end to balance that with wanting a good time in the present- assuming that I might just drop my bike in traffic or something sometime. But 30 years isn't impossible to imagine... hmmmm....

Wow, good even split on the responses to this survey. I like that!

I'd go for the annuity because $$ return from the lump sum over time will vary based on the markets (it'll average X%, but some years it might go up 40% and then another year it might lose 50% and wipe out a lot of gains) while the annuity is a guaranteed income. Either way, inflation & taxes will take a big bite out of the winnings.

annuity

dab, jonathan: Ever thought about the possibility you could die before the 30 years end? So, just take it all!!

Take the money now...what if I die before 30 years is up???

That doesn't sound right. I was under the impression that you are receiving 1.2 million now _because_ they already cut all the taxes from some sum that is not 3 million but is larger than 1.2 million (maybe 1.8 to 2 million?). Also, consider that 30 years is an awful lot of time and whatever they are investing in/doing to the money might fail them just as much as it might fail me (in case I get the lump sum and try to invest it myself) and sure I'm more likely to make bad investments but I don't have that much trust that the government will not change its mind and make my annuities disappear, so I'd rather have it all now thanks. Besides I might not live for another 30 years and we'll have more use of the money now.

I think it'd just be more fun to have the lump sum. It sounds more impressive.
Note that no one's said they wouldn't take the money!

I'm unclear on what an annuity is. ...but, I'd take a lump sum because I think the markets are in a boom that will continue for a while. I think returns od %20 will be common for at least the next few years. Thus I'd rather start with 1.2M now and build from there.

bill: An annuity is a sum of money payable yearly or at other regular intervals.

vos: if I die before the 30 years ends I'm hardly going to be in a position to care now am I?

I can live quite comfortably on 100,000 per year, thanks. Still, it would be nice to get some up-front to buy the house, car, vacation, get that over with, without having to lose out on the interest.

Past Performance Is No Guarantee Of Future Results.

For that amount I'd probably go with the lump sum, but I'd want to find out which way would be more heavily taxed before making my decision. If it were more than a few million I'd take the annuity since I think that amount all at once would be rather overwhelming.

Lump sum. Lotteries tend to invest the money in very safe low return securities and accounts. I dare say that I can turn the money into a far better sum using my own investments.

An annuity is a stream of income generated from a contract. The starting principle is freely given to an insurance company in exchange for this guarantee of a stream of income. In a simple annuity there is no guarantee that you will live long enough to collect the full amount that was invested in principal. Most annuities have various annuitization options which could allow for some death benefit at the death of the annuitant.

Lump sum- and I'd split it with Matt!

I'd do the same thing :)

I would take the lump sum, invest it in a diversified portfolio, and likely end up with way more than 100K per year. My mutual fund has been consistently performing in the mid-30% range. I don't understand why someone said an 11% rate is the best one could hope for over the long haul, I am not a financial wizard, but all my experience and reading points to the contrary.

sequel: we are talking about a 30 year term. Pick any mutual fund that has been around for 30 years and look at its average return over those 30 years. There are many with results over 10%, a few with results over 15%, and one that I know of with results over 20%. Sure, you could have been lucky and picked that one. But that wouldn't be a diversified portfolio. If you diversified, you would have been very, very lucky to get 15% before taxes. Conventional wisdom says that 10% is a more reasonable expectation, although perhaps even as high as 12% would not be out of line for such a long timeframe. On top of that, many of the highest-performing mutual funds are badly tax-managed, meaning that instead of 20% you would have paid around a third of that money in taxes, reducing your return to 7-10% after taxes. This might beat the annuity, but then again it might not, and who wants to gamble on that when the odds are only even?

My mutual funds have been performing astoundingly as well -- 34.5% over the last year, thanks to a big position in JAWWX -- but I don't expect them to keep doing so forever.

phi - Pardon my ignorance...JAWWX??

Janus Worldwide.

Ah...thanks.

I'd take the $100,000 annuity. Even if I don't live another 30 years (which I probably won't), I'm pretty sure I'll live another 13 years, and it would be more stressful to get the money all at once.