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Lottery Winners: Lump sum or payout over time?

I am pretty sure there exists research in how lottery winners actually end up faring, and some it may well differntiate between lump sum and payment plan recipients.
I am pretty sure that this research shows that people are frustratingly likely to blow through no matter how much they won. And that this is at best weakly correlated to how smart and disciplined the winners are or perceive themselves to be.

I am pretty sure therefore that a payment plan is generally the better option. Issues of taxes, interest rates etc dwarf relative to winners high on money craving three mansions and eight luxury cars. Or investing in super-charged start-ups.

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Also, I know of lotteries that pay a life-long rent of a fixed monthly amount. Obviously, those are the best when you are young, and a joke if you are 85 already. Also, these get up eaten by inflation in the long run.
Not sure if lump sums are offered as an alternative. You would then have to calculate the capital value of either alternative, given your personal current remaining life expectancy.
 
I am pretty sure there exists research in how lottery winners actually end up faring, and some it may well differntiate between lump sum and payment plan recipients.
I am pretty sure that this research shows that people are frustratingly likely to blow through no matter how much they won. And that this is at best weakly correlated to how smart and disciplined the winners are or perceive themselves to be.

I am pretty sure therefore that a payment plan is generally the better option. Issues of taxes, interest rates etc dwarf relative to winners high on money craving three mansions and eight luxury cars. Or investing in super-charged start-ups.

----

Also, I know of lotteries that pay a life-long rent of a fixed monthly amount. Obviously, those are the best when you are young, and a joke if you are 85 already. Also, these get up eaten by inflation in the long run.
Not sure if lump sums are offered as an alternative. You would then have to calculate the capital value of either alternative, given your personal current remaining life expectancy.
 
I think I'd get with a financial planner, and compare the results of buying my own annuity with the lump sum. I don't know how that would typically work out.
 
Leaving aside the fact that any way you invest the lump sum will also have its risks, I don't see the advantage of taking the lump sum. You will be heavily taxed on the lump sum meaning that any returns from the remains that you have invested will be smaller and you will be taxed on these returns as well.

What I said before: you're trying to trick the taxman by having less money. Of course you pay less tax if you're getting less money. "I'm a genius, I'm receiving 100,000 a year and only paying taxes on that!" "Yeah, well I have 230,000,000 right now and just bought a hotel." Taking the payout over time causes less tax, sure, because you're not getting as much money.

Tax is a percentage, you only get big tax if you're already having big money. Avoiding receiving the big money because you mourn the difference between the theoretical (and unobtainable) total and the big money you get more than you value the big money itself is...crazy.
 
What I said before: you're trying to trick the taxman by having less money.
And what I said before, there is no trickery here. It is perfectly legitimate. Why anybody would be happy to give half their winnings to the tax man just so they can splurge is beyond me. Other than maybe buying some big ticket items, you should prefer to invest your winnings to get a steady income stream.

I'm receiving 100,000 a year and only paying taxes on that!" "Yeah, well I have 230,000,000 right now and just bought a hotel."
Worst mathematics ever!
 
I am pretty sure there exists research in how lottery winners actually end up faring, and some it may well differntiate between lump sum and payment plan recipients.
I am pretty sure that this research shows that people are frustratingly likely to blow through no matter how much they won. And that this is at best weakly correlated to how smart and disciplined the winners are or perceive themselves to be.

I am pretty sure therefore that a payment plan is generally the better option. Issues of taxes, interest rates etc dwarf relative to winners high on money craving three mansions and eight luxury cars. Or investing in super-charged start-ups.

----

Also, I know of lotteries that pay a life-long rent of a fixed monthly amount. Obviously, those are the best when you are young, and a joke if you are 85 already. Also, these get up eaten by inflation in the long run.
Not sure if lump sums are offered as an alternative. You would then have to calculate the capital value of either alternative, given your personal current remaining life expectancy.

Much of the common knowledge about the outcome of windfall recipients turns out to be bunk and modern myth.

The thinktank that is often falsely attributed for the "70% of windfall recipients end up bankrupt" has issued a statement disclaiming the statement as totally fabricated.

https://www.nefe.org/news/2018/01/research-statistic-on-financial-windfalls-and-bankruptcy.aspx

Actual research into the matter found that the overwhelming majority of lottery winners didn't end up pissing it all away or abandoning their previous lives, but in fact ended up wealthier and more satisfied in life than they would have been years down the line.

“We saw that people who won large sums of money were still wealthier 10 years after the fact, compared to people who won small sums of money,” he says. “Also, if you look at things like labor supply – the people who win large sums of money do cut down on work but it’s quite rare for them to quit altogether. They cut down mostly in the form of taking longer vacations.”

Cesarini says people expect that a lot of winners immediately squander their wealth, but that is rare.

He adds: “What we see consistently is that they work a little bit less, but they spend the money quite intelligently. But that’s not to say that nobody has wrestled with self-control problems and using the money in ways that are not conducive to their best interest. But, I think that their behavior is a lot more governed than you might believe if you’re reading popular accounts of what happens.”

https://time.com/5427275/lottery-winning-happiness-debunked/

I'm guessing a lot of this myth about how large windfalls get squandered away have a lot to do with moralizing about sources of wealth punctuated by the few but notorious examples of unwise people squandering away a fortune. Obviously, in a just world, people who luck into money are not going to really enjoy such things compared to those that "earn" wealth.
 
Every other payday I allow myself 20 dollars and all I get are the "Win for Life" scratchers where the prize is X amount of money a day/week/year for the rest of your life.

Those I like. Even the smallest would be like having a decent paying job 2nd job you just never had to go to. And since I'm retired military with another more "official" income flow and insurance and all that winning one of those would be sweet.
 
As an aside, the payout turned out to be by far the best decision. Interest rates were high at the time and a lump sum would have been far, far smaller. Interest rates decreased a lot over the next 20 years.

How does it actually work? If the lump sum was, for example, $20 million, what would the annual pay out be, and for how long? If interest rates were high, then surely you'd get a better return if you took the lump sum and invested it?

I think in the UK we only have the option of the lump sum.
 
How does it actually work? If the lump sum was, for example, $20 million, what would the annual pay out be, and for how long? If interest rates were high, then surely you'd get a better return if you took the lump sum and invested it?

I think in the UK we only have the option of the lump sum.

There's also the opportunity cost of not having the money right away, depending on the amount.

Like, are you going to keep paying rent for years rather than buy a reasonably priced home because you decided you don't trust yourself with all the money up front? Having the money now might open up opportunities that exceed the value of whatever interest rate is being offered by a managed payout.
 
And what I said before, there is no trickery here. It is perfectly legitimate.

I didn't mean trick in the sense that it wasn't legitimate, I meant trick in the sense of "one weird trick" which, in this case, is cutting off the nose to spite the face.

Why anybody would be happy to give half their winnings to the tax man just so they can splurge is beyond me. Other than maybe buying some big ticket items, you should prefer to invest your winnings to get a steady income stream.

Again, there are not only two option: take the small payouts over time, or splurge immediately. You can take the lump sum and then invest it. You don't have to spend a cent beyond the taxes. As for the taxes you aren't "losing" that money, you're simply not getting that money. And my position is that somebody who mourns the "loss" of the difference between the unobtainable total award and the actual lump sum retrieved more than they value that lump sum is crazy.

You're getting less money. What money you are getting is in somebody else's control. It is vulnerable to circumstances outside your control. If it is stopped you may not be able to obtain it again. The sensible position is to take all the money you can get, which is the lump sum after tax, and invest it yourself in instruments you control and have access to. Then you get that steady income stream while reducing the risk of losing out. That is certainly worth pay taxes which is going to happen sooner or later anyway. You can't escape tax. You're paying tax in both scenarios. I say it's better to pay the tax and be super-rich than pay the tax and be middle-class income.
 
You are not paying taxes twice on the same money if you take the lump sum and then invest it. You pay taxes on the lump sum then you pay taxes on the money earned by your investments. It's really the same if you take the annuity since you will owe taxes on the original amount plus the annuity's earnings.

If you take the annuity option, you will defer the taxes until the payments are received. The overall tax rate may be slightly lower because less of the money is in a higher tax bracket. But I doubt the overall percentage you would pay in taxes is much higher.

If you take the lump sum you can probably invest it in ways that reduce the tax burden and earn more than the annuity would pay. But, you would be taking a greater risk.

In conclusion, I have spent much more time thinking about this than I should based on the likelihood of ever winning one of those big cash prizes.
 
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Why anybody would be happy to give half their winnings to the tax man just so they can splurge is beyond me. Other than maybe buying some big ticket items, you should prefer to invest your winnings to get a steady income stream.
Again, there are not only two option: take the small payouts over time, or splurge immediately. You can take the lump sum and then invest it.
Oh. That's completely different - NOT.

As for the taxes you aren't "losing" that money, you're simply not getting that money.
That is a meaningless distinction. The important question is whether the money you are missing out on is money you could otherwise have if you structured your payouts in the right way.

The main problem with taking the a series of payments instead of the lump sum is that they are fixed so whittled down by inflation over time. If the payments are excess to your needs then you can still invest the surplus to mitigate this. If taking the annuity is risky, so is investing your winnings.

At the end of the day, it all comes down to maths. (For example, if we assume a discount rate of 3% then a $20,000,000 lump sum would be worth $750,000 per year for 20 years).
 
Oh. That's completely different - NOT.

I don't know how you do your own investing, but I think having control of the investments and choosing what and where they are is critical. In my choice, Grandma hands me a stack of cash and I can invest it as I please. In your case, you agree that Mom will give you a small allowance periodically that will eventually add up to more than what Grandma offered. She's keeping the money perfectly safe as cash in a wooden box next to the fireplace and will dole out your payments.

That is a meaningless distinction. The important question is whether the money you are missing out on is money you could otherwise have if you structured your payouts in the right way.

The main problem with taking the a series of payments instead of the lump sum is that they are fixed so whittled down by inflation over time. If the payments are excess to your needs then you can still invest the surplus to mitigate this. If taking the annuity is risky, so is investing your winnings.

The annuity carries additional risks the self-investment doesn't, though: you don't have control. You don't have choice. Companies go under. An annuity isn't paid out from money that's sitting around somewhere -- it's invested, too. So you get all the normal risks of investment with less control of it.

Bird in hand. Better a million now than a million and twenty in twenty years pinky-promise if everything works out okay for all parties concerned.

At the end of the day, it all comes down to maths.

No, there's more than math involved when it comes to money. Otherwise the stock market would be a very different place.
 
Continuing the fruitless speculation on money we'll never see, I would add, in favor of the lump sum, that how you invest, and in what, can make a big difference in tax. So while it's true that you pay a whopper of a tax at the start, what you're left with is clear. You don't have to invest it in the most lucrative taxable ways. You could buy municipal bonds, T-bills, and other things that generate income which is not fully taxable. And, of course, like it or not (and many certainly do not, at least until they win a lottery) if your annuity payout is taxed as regular income, you pay a higher tax than you will if you invest and take long term gains.

e.t.a. assuming this is US. I have no idea how taxation is arranged elsewhere.
 
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Continuing the fruitless speculation on money we'll never see, I would add, in favor of the lump sum, that how you invest, and in what, can make a big difference in tax. So while it's true that you pay a whopper of a tax at the start, what you're left with is clear. You don't have to invest it in the most lucrative taxable ways. You could buy municipal bonds, T-bills, and other things that generate income which is not fully taxable. And, of course, like it or not (and many certainly do not, at least until they win a lottery) if your annuity payout is taxed as regular income, you pay a higher tax than you will if you invest and take long term gains.

e.t.a. assuming this is US. I have no idea how taxation is arranged elsewhere.
I get that but we are speculating in the dark. We need some data. Since we don't have any, let's make some up.

Suppose that you have the choice between $20,000,000 lump sum or $750,000 per year for 20 years. And suppose that the tax on each is 50%. Then taking the first option, you would get $10,000,000 in hand which you decide to invest. A reasonable rate of return might be 5% per annum or $500,000 which, after tax would be $250,000 pa (I suspect that your rate of return will be a lot lower if you invest in "municipal bonds, T-bills, and other things that generate income which is not fully taxable").

The second option would return after taxes $375,000 per year.

Of course, this is not the whole story. Your investments may generate income for a lot longer than 20 years or the income may increase with inflation.
 
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It would be a trivial exercise for a local accountant to figure out which approach resulted in more post-tax money or which investment strategies might outperform whatever annuity is offered.

Mark Cuban's advice seems to be rooted less in the nitty gritty details of tax avoidance or investment strategies and more to do with the common misconception that windfall recipients have a high likelihood of squandering their fortunes or otherwise mismanaging their affairs, which seems to be a modern myth with very little evidence supporting it.
 
The problem is the Venn Diagram of people who are that good in investing and people who play the lottery is a very small sliver.

Lotteries are a "Get Rich Quick" dream for 99% of the people who routinely play them outside of an occasional lark.

And neither "Getting paid 1/30th of the value over the course or 30 years" or "Taking your winnings and reinvesting them" scratches that same emotional and narrative itch even if it technically gets you more money.

You win the lottery and YOU STOP WORRYING ABOUT MONEY is the (arguably naïve given the history of lottery winners) narrative. You win the lottery and move to the beach and buy a yacht and all that.
 
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The problem is the Venn Diagram of people who are that good in investing and people who play the lottery is a very small sliver.

Lotteries are a "Get Rich Quick" dream for 99% of the people who routinely play them outside of an occasional lark.

And neither "Getting paid 1/30th of the value over the course or 30 years" or "Taking your winnings and reinvesting them" scratches that same emotional and narrative itch even if it technically gets you more money.

You win the lottery and YOU STOP WORRYING ABOUT MONEY is the (arguably naïve given the history of lottery winners) narrative. You win the lottery and move to the beach and buy a yacht and all that.


What "history"?

Again, the available evidence shows that the "lottery winner broke in 5 years" is very much not the norm

The pernicious myth that poorer people can't be trusted to manage their own money seems to be entirely rooted in stereotypes and confirmation bias, but awfully light on evidence.
 
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What "history"?

Again, the available evidence shows that the "lottery winner broke in 5 years" is very much not the norm

The pernicious myth that poorer people can't be trusted to manage their own money seems to be entirely rooted in stereotypes and confirmation bias, but awfully light on evidence.

Jesus Christ I'm sorry I suggested poor people weren't perfect all the time in front of "The Board's Resident Chip On the My Shoulder Yeah You Wanna Fight About It" Super Progressive.

My point is for most people winning the lottery is about instantly becoming rich and neither the "Long term payout" or "Now become a brilliant investor" feed into that wish.
 
In the case of my wife's young friend, who was just starting college at the time, I think she wisely chose the long term payout and not letting it change her life's trajectory too much. Seems remarkable she went on to finish college and become a school teacher. I wouldn't have had the discipline. She did use some of the money to help her parents and gradually invested in the stock market and real estate.

While it was pure luck to take the long term payout when interest rates were about to start a long term decline, to me these were the standouts:

1. She didn't let it affect her life. Remarkable for someone 20 y/o.
2. She wasn't attacked by lots of grifters looking for handouts or offering "investments".
3. She was one of my wife's close friends for about a decade w/o my wife knowing.

As an aside, she rarely played the lottery. Just had some spare change after buying groceries and took a flier on what was left. She didn't find out until a friend mentioned she heard on the news a big winner had bought a ticket at a local store they both shopped at. Then looked up her ticket.

To which I’d add
4. She actually knew where her ticket was and checked it.
 
Jesus Christ I'm sorry I suggested poor people weren't perfect all the time in front of "The Board's Resident Chip On the My Shoulder Yeah You Wanna Fight About It" Super Progressive.

My point is for most people winning the lottery is about instantly becoming rich and neither the "Long term payout" or "Now become a brilliant investor" feed into that wish.

I mean, you're credulously repeating a popular urban legend on a skeptic's board, if there's anyplace on the internet you should catch **** for this it's here.

The "lottery curse" is fake, but widely believed. People frequently cite zombie statistics that have been revealed to have been totally fabricated.

Very prime trope for skeptical probing. The evidence shows that people manage their windfalls fine.

I don't consider "don't be a credulous rube" a particularly progressive issue, more just general skepticism.
 
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I get that but we are speculating in the dark. We need some data. Since we don't have any, let's make some up.

Suppose that you have the choice between $20,000,000 lump sum or $750,000 per year for 20 years. And suppose that the tax on each is 50%. Then taking the first option, you would get $10,000,000 in hand which you decide to invest. A reasonable rate of return might be 5% per annum or $500,000 which, after tax would be $250,000 pa (I suspect that your rate of return will be a lot lower if you invest in "municipal bonds, T-bills, and other things that generate income which is not fully taxable").

The second option would return after taxes $375,000 per year.

Of course, this is not the whole story. Your investments may generate income for a lot longer than 20 years or the income may increase with inflation.

It is indeed complicated, but in your calculations, if you're doing it for the United States at least, you must include the fact that capital gain is taxed at a much lower rate than regular income. If you invest large parts of your lump sum in a form that generates capital gain rather than income, you are taking some chances with the market and the possibility of loss, but if you do it right, you will pay lower tax on the proceeds.

That, of course, along with the risk, entails a fair amount of work to do right, and as others have pointed out, this kind of financial manipulation is not quite so likely to be among the skills of the very people who actually play the lottery and win. But it needs to be reckoned in.
 
It is indeed complicated, but in your calculations, if you're doing it for the United States at least, you must include the fact that capital gain is taxed at a much lower rate than regular income. If you invest large parts of your lump sum in a form that generates capital gain rather than income, you are taking some chances with the market and the possibility of loss, but if you do it right, you will pay lower tax on the proceeds.

That, of course, along with the risk, entails a fair amount of work to do right, and as others have pointed out, this kind of financial manipulation is not quite so likely to be among the skills of the very people who actually play the lottery and win. But it needs to be reckoned in.

A big draw of the lump sum is that it also allows you to purchase things outright that you otherwise probably would have needed to borrow money for.

No more paying the bank 6% for decades on a mortgage or for a car loan or whatever, just buy it in cash and save yourself tens of thousands of dollars of potential interest.

With this kind of windfall you'd never have to pay money to borrow money again, nor piss away your wealth renting a home rather than owning.

If anything, the lump sum seems to have the most potential to be used wisely rather than delaying wise investments in service of some annuity scheme.
 
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A big draw of the lump sum is that it also allows you to purchase things outright that you otherwise probably would have needed to borrow money for.

No more paying the bank 6% for decades on a mortgage or for a car loan or whatever, just buy it in cash and save yourself tens of thousands of dollars of potential interest.

With this kind of windfall you'd never have to pay money to borrow money again, nor piss away your wealth renting a home rather than owning.

If anything, the lump sum seems to have the most potential to be used wisely rather than delaying wise investments in service of some annuity scheme.

With the $1M in annual annuity, I expect the OP's FOAW can pay cash for homes, cars and the like regardless. Perhaps not a billionaire lifestyle but plenty I think for most peoples' reasonable fantasies.
 
With the $1M in annual annuity, I expect the OP's FOAW can pay cash for homes, cars and the like regardless. Perhaps not a billionaire lifestyle but plenty I think for most peoples' reasonable fantasies.

Sure, a big enough prize makes the distinction less meaningful.
 
It is indeed complicated, but in your calculations, if you're doing it for the United States at least, you must include the fact that capital gain is taxed at a much lower rate than regular income.
And presumably, the tax on any dividends has already been paid by the company (that's how it works in Australia) so you wouldn't have to pay it again. The point is that lump sum vs annuity is not an open and shut case.

That, of course, along with the risk, entails a fair amount of work to do right, and as others have pointed out, this kind of financial manipulation is not quite so likely to be among the skills of the very people who actually play the lottery and win. But it needs to be reckoned in.
Ignoring that you have stereotyped lottery winners as "stupid" (which is actually an argument in favour of the annuity), I would point out that anybody can take Warren Buffet's advice and invest their winnings into index funds. These are usually safe enough outside of a global depression.
 
And presumably, the tax on any dividends has already been paid by the company (that's how it works in Australia) so you wouldn't have to pay it again. The point is that lump sum vs annuity is not an open and shut case.


Ignoring that you have stereotyped lottery winners as "stupid" (which is actually an argument in favour of the annuity), I would point out that anybody can take Warren Buffet's advice and invest their winnings into index funds. These are usually safe enough outside of a global depression.

Every day people are trusted to more or less self-manage their 401k retirement funds. Seems like a similar proposition in spirit. How many are investing theirs wisely, like in cheap target date index funds, vs potentially squandering their retirement chasing the stock market by stock picking, or worse getting suckered into outright scams like crypto or penny stocks?
 
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Much of the common knowledge about the outcome of windfall recipients turns out to be bunk and modern myth.

The thinktank that is often falsely attributed for the "70% of windfall recipients end up bankrupt" has issued a statement disclaiming the statement as totally fabricated.

https://www.nefe.org/news/2018/01/research-statistic-on-financial-windfalls-and-bankruptcy.aspx

Actual research into the matter found that the overwhelming majority of lottery winners didn't end up pissing it all away or abandoning their previous lives, but in fact ended up wealthier and more satisfied in life than they would have been years down the line.



https://time.com/5427275/lottery-winning-happiness-debunked/

I'm guessing a lot of this myth about how large windfalls get squandered away have a lot to do with moralizing about sources of wealth punctuated by the few but notorious examples of unwise people squandering away a fortune. Obviously, in a just world, people who luck into money are not going to really enjoy such things compared to those that "earn" wealth.

Thanks for the links, and the effort to actually search for work on the matter.

When I wrote my previous post, I was travelling and on my phone and not inclined to do any research myself just yet, so I threw out the idea that there should be some research out there somewhere; and I seem to remember to have read about some studies, but will admit now that I don't actually remember results with any clarity.

I don't think I ever came across a restatement of the "NEFE" rumor that claims a 70% bankruptcy - that seems far too high even to me.

What I would intuit is that random people who suddenly are caught in a huge windfall, being entirely unexperienced and most likely insufficiently educated about it, are more likely than not to take bad decisions both on the savings/investment side and on luxury expenses. This does not mean they'll go bankrupt, just that they end up less rich than they might be if they were smarter.
And with this, my intuition holds that for many people, a payout plan may see them end up richer on average than with a lump sum payout, provided (a) the payment plan is fair and accrues average annual gains (at least for conservative investments; say 5% annually for a life insurance kind of plan) to the winner; and (b) local tax laws do not treat both options significantly differently

And now, I am gonna try my Google-foo....
 
There's also the opportunity cost of not having the money right away, depending on the amount.

Like, are you going to keep paying rent for years rather than buy a reasonably priced home because you decided you don't trust yourself with all the money up front? Having the money now might open up opportunities that exceed the value of whatever interest rate is being offered by a managed payout.

You can buy a house on a loan, and if you can show your bank that you have a very handsome guaranteed annual or monthly payment coming your way for the next 20 years, you can surely negotiate the lowest possible interest on that loan - and pay it off in very short years.
I mean, if you end up paying more than a decade for that house, then the windfall wasn't that windy to begin with, OR you are damned fool who buys a needlessly expensive piece of ******** property.
 
...
The annuity carries additional risks the self-investment doesn't, though: you don't have control. You don't have choice. Companies go under. An annuity isn't paid out from money that's sitting around somewhere -- it's invested, too. So you get all the normal risks of investment with less control of it....

Less control does not equal less risk.

If I sit in the pilot's seat of a 787 instead of an actual pilot, I have more control, but far less security.

As has been pointed out before, the typical lottery will have the money in really safe types of investments, and sometimes even be guaranteed by the state. Pretty sure the money will be handled by some insurance company, and insurance companies ought to be backed up by re-insurers, and those might even be backed up by states / countries.

When you invest yourself, no matter what you invest in, you run the risk of losing any item in your portfolio:
- You buy bonds - issuer goes broke
- You buy stocks - company goes broke
- You buy investment funds - the managers may turn out to be crooks
- You buy a house - it burns down, and your insurer happens to go broke, too
- You buy a life insurance plan - that's about as safe as what the lottery does, BUT you cannot take out that money (or you lose money), it is no longer under your control.

So all the same risks - plus the biggest: That you turn out to be stupid, or undisciplined, or you find out your nephew is a member of the local mafia and arranges for an amicable transfer of funds to your friendly neighborhood Don.
 
The problem is the Venn Diagram of people who are that good in investing and people who play the lottery is a very small sliver.

Lotteries are a "Get Rich Quick" dream for 99% of the people who routinely play them outside of an occasional lark.

True, but the exercise of imagining what you'd do with lottery windfalls isn't entirely useless: it's practice for if you do happen to come into money from a more ordinary source, like inheriting from an older generation of your family. Of course that's probably not going to be as much as a lottery win, but it's something. A surprising amount of the population has no idea how to handle money.
 
Less control does not equal less risk.

There's the omnipresent risk of investment in both scenarios. The payment over time scenario carries some additional risks that the lump sum doesn't: the risks of mismanagement, the risks of reliance on other bodies to handle the money wisely, etc.

If I sit in the pilot's seat of a 787 instead of an actual pilot, I have more control, but far less security.

As has been pointed out before, the typical lottery will have the money in really safe types of investments, and sometimes even be guaranteed by the state. Pretty sure the money will be handled by some insurance company, and insurance companies ought to be backed up by re-insurers, and those might even be backed up by states / countries.

We had a state default on paying its lottery winners recently, I think it was Illinois or Indiana. What recourse did the victims have? They could sue...if they had the money, and if the state didn't decide sovereign immunity. I don't remember how the case turned out, but it did reinforce my belief that having the money yourself is preferable.

And insurers are not immune to failure, either.

When you invest yourself, no matter what you invest in, you run the risk of losing any item in your portfolio:

Yes, I'm aware of that. Let's lump all those risks under X. The lump sum strategy carries risks X. The annuity strategy carried X plus Y. Y is not negative, and Y is not zero.

So all the same risks - plus the biggest: That you turn out to be stupid, or undisciplined, or you find out your nephew is a member of the local mafia and arranges for an amicable transfer of funds to your friendly neighborhood Don.

I don't run either of those risks myself so I needn't consider them.
 
You can buy a house on a loan, and if you can show your bank that you have a very handsome guaranteed annual or monthly payment coming your way for the next 20 years, you can surely negotiate the lowest possible interest on that loan - and pay it off in very short years.
I mean, if you end up paying more than a decade for that house, then the windfall wasn't that windy to begin with, OR you are damned fool who buys a needlessly expensive piece of ******** property.

Any favorable rate from the bank is still going to be more than the 0% you'd get from self-financing.

The ability to borrow money against your annuity kinda makes the whole idea of this being a useful way to curb reckless spending moot. If banks are willing to use my future annuity as collateral for a loan, then there's nothing preventing me from blowing through all the fortune on borrowed money now and defaulting on the loans, losing my collateral in the process.

You could imagine someone on these structured schemes still ending up more or less hand-to-mouth broke because all their yearly payouts are going towards servicing loans they already frivolously blown through.

I don't see how there's one quick and easy trick to prevent people who are unable to control their own finances from self-sabotaging.
 
I really think some here are overblowing how hard it is to manage money.

I set up my first 401k account when I was 21 and knew next to nothing about managing money. I couldn't even afford to move into my first solo apartment without taking a $2,000 line of credit using my sparkly new job offer letter as proof that I was good for this princely sum. You don't need an Accounting degree to figure this kind of stuff out.

It takes like half an hour of perusing online to come to the conclusion that low cost index funds, like auto adjusting "target date" funds, are a pretty outstanding investments that require almost no monitoring. If you're maximally risk averse there's always T-bills or other similarly safe, if low returning, options.

Or just hire a fancy accountant that isn't some sales-commission earning charlatan to hold your hand and walk you through it. If you've hit the lottery you can afford to blow $500 an hr on getting professional help.

The real difficulty will be more of a social, not financial nature I suspect. You have to be prepared to turn down long lost relatives and friends that descend out of the woodwork with sketchy propositions (though I'm not saying throwing some money to people you like is necessarily a bad idea, so long as you understand that these are gifts, not investments)
 
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And presumably, the tax on any dividends has already been paid by the company (that's how it works in Australia) so you wouldn't have to pay it again. The point is that lump sum vs annuity is not an open and shut case. Unfortunately we also pay tax on dividends as income, so that part is not so favorable. It's worse in some states where the state tax makes a distinction for "unearned income," but this varies from stat to state. In any case, not all good investments pay good dividends, so one can, perhaps get some dividends and some gain and still come out ahead. Or if the gain is the point and the dividends a bonus, use the dividends for tax-offsetting charitable donations. Lots of possibilities, depending on what you want to do and what your desired life is going forward.


Ignoring that you have stereotyped lottery winners as "stupid" (which is actually an argument in favour of the annuity), I would point out that anybody can take Warren Buffet's advice and invest their winnings into index funds. These are usually safe enough outside of a global depression.
I did not characterize anyone as stupid. I do anecdotally suspect that the majority of people who play the lottery are not the minority who have the best financial skills, and I did mean this statement to be in favor of the annuity. Making a go of a lump sum takes some proactive financing, as well as a tolerance for variability and risk. The simpler choices are to take the annuity or to take the lump sum and not worry about the finer arithmetic. That last is one of the considerable possibilities if the sum is big enough, and especially if one is older. If I got a half billion dollar lotto win now, I would probably go ahead and set up some trusts or something for some descendants, but otherwise, I would not worry about it. I can live without it already, after all, so why not just have fun till I die?

e.t.a. it would be quite different, however, if I got a million or two and were younger. This would be a real instance of opportunity cost if a lump sum allowed me to buy a house, for example, mortgage-free.
 
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I get that but we are speculating in the dark. We need some data. Since we don't have any, let's make some up.

Suppose that you have the choice between $20,000,000 lump sum or $750,000 per year for 20 years. And suppose that the tax on each is 50%. Then taking the first option, you would get $10,000,000 in hand which you decide to invest. A reasonable rate of return might be 5% per annum or $500,000 which, after tax would be $250,000 pa (I suspect that your rate of return will be a lot lower if you invest in "municipal bonds, T-bills, and other things that generate income which is not fully taxable").

The second option would return after taxes $375,000 per year.

Of course, this is not the whole story. Your investments may generate income for a lot longer than 20 years or the income may increase with inflation.

Uhm ... okay ... not okay! :p

For starters: 20 * 750,000 = 15 million.
That's 5 million less than the lump sum you propose.
Doesn't make an aweful lot of sense, does it? At least I don't get it.
The least I would expect would be a payout of 1 million for each of the next 20 years.
And so, assuming 50% flat tax rate, 500,000 into your bank account.

The question is then: Do you spend the full 500,000, or spend less and invest the balance?
Let's say you spend it all:
Then after 20 years, you are left with - nothing. And need to dratically revert your lifestyle back to where you came from.
Now, lump sum: You get 20 million, you pay 10 million in taxes right away so you are left with 10 million, you blow 500,000, invest 9.5 million at 5% per annum, on which you again pay 50% taxes immediately, so effective interest rate is 2.5% per annum: 237,500 is added to your wealth; you now have 9,737,500. Next year, you take out 500,000, and invest 9,237,500 at 2.5% net interest rate... and so forth...

...*creates a spreadsheet*...

...then after 20 years have completed, and you have taken out half a million 20 times, and earned 2.5% interest on the remainder, you still have about 3.3 million left.

So taking the lump sum is, to no-one's surprise, superior to an annual payment that does NOT earn you any interest.

(But you are still blowing through your money that way: In year 28, you'll have spent all your money)

A better strategy of course would be to NOT spend 1/20th of your wealth every year. Or your entire annual payout, when payouts end after 20 years.

The smart way would be to take out a little less than your interest after taxes. So, say, spend only 225,000 per year, if you earn 237,500 in interest in year 1.

That way, your lump sum of 10 million will have grown to about 10.5 million after 20 years.

But now, if you take the payout plan, you'll have cash left after the end of every year that you can invest!
After the first year, you have 275,000 left, on which you earn only 6,875 after another year. But as your depot grows in value, so does the value of your interest, and after 20 years, you have 7.25 million left.

Again, that's (of course) less than what the lump sum gave you.

----

But NOW let's modify the payout plan such that it implies a 5% guaranteed interest rate on the original 20 million which the lottery parks with an insurance company. This happens when the annual payout is about 1.25 million (my spreadsheet thinks: 1,251,652), and the 20 annual rates sum up to 25 million! Then, after paying 50% tax on each rate and cashing in 625,826 per year, you can blow 625,826 each year and end up with nothing when the 20 years are history.

Do the same with 20 million lump sum, earn 2.5% interest after tax, take out 625,826 every year, and you will also end up with zero after 20 years.

---------------

Now, the math of course gets a little more complicated when you want to factor in inflation / increased spending, and also want to end up with enough money after 20 years that it lasts you for the rest of your life. Which has two variants:
A) You die with the equivalent of 10 million plus accrued inflation
B) You die with nothing
Strategy A) is more or less straightforward: You spend only the money from interests earned that exceeds the inflation rate. (Which may be difficult to do in some years if indeed you only earn 2.5% after taxes!)
Strategy B) can only, or best, be done by puting the remainder of your money in a life insurance kind of investment plan: The insurance knows your life expectancy, and its standard variation, and can compute at which payout rates the expected value of the investment at the time of your death is zero.

----------------

And a further complication is indeed that perhaps you want to spend a lot of the windfall on luxury early, so you enjoy it the longest time. So, buy that fancy mansion in Southern France, plus the super sports car that best matches the color of the car port, plus the yacht, in year one. That leaves you with a lot less to invest. Ooooooor are you of the type that you think you may resist the urge to do all that, and settle for a smaller mansion, or one in a less fancy region, and wait with the sports car another year, and with the yacht until after you had the time to get your own high seas sailing license so you can additionally save on the skipper the first three years? Then the annual payout rates may help your discipline to stick with that plan.

=======

Long story short:
It's complicated, really.
And, as someone said in a quote that I read, when you are really stinking filthy rich al of a sudden, perhaps it doesn't matter so very much if you totally optimize your finances. Enjoy life!
And see a pro once a year to check if you are not on a course already to blow it all through the pipe.
I mean, 20 million, whether in lump or in 20 rates of a million, should see you through easily. And if 15 mio go to waste and you find yourself left with only 5 million, you should still be able to live comfortably till you die. Especially if you do something, anything, to earn an ordinary living on the side.
 
Any favorable rate from the bank is still going to be more than the 0% you'd get from self-financing.

The ability to borrow money against your annuity kinda makes the whole idea of this being a useful way to curb reckless spending moot. If banks are willing to use my future annuity as collateral for a loan, then there's nothing preventing me from blowing through all the fortune on borrowed money now and defaulting on the loans, losing my collateral in the process.

You could imagine someone on these structured schemes still ending up more or less hand-to-mouth broke because all their yearly payouts are going towards servicing loans they already frivolously blown through.

I don't see how there's one quick and easy trick to prevent people who are unable to control their own finances from self-sabotaging.

Agreed.
I guess my main point was that if you cannot self-finance a house with the annual payouts, then either it's not a life-chaging windfall, or you ARE spending recklessly on too expensive a house.

When you have the money in the bank already, you can fire it away without any further effort.
If you need to take a loan against your annuity, you at least need to go see a bank employee and discuss the scheme with them. Some people will come to their senses then, or drop the silly idea before going to the bank.
 
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