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Questions on how we spend our money and our time - consumer goods and services, home and vehicle, leisure and recreational activities
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Re: Powerball math: annuity is better?

Post by greg24 »

Best return is to not play.
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Re: Powerball math: annuity is better?

Post by westie »

annuity is a bad idea in most cases....

http://finance.yahoo.com/news/taxes-1-4 ... 22750.html
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Re: Powerball math: annuity is better?

Post by southbay »

Does it really matter?

Invest the $ instead of throwing it away on the lottery.
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Re: Powerball math: annuity is better?

Post by LearningtheRopes »

letsgobobby wrote:Ignore the possibility of not being paid (a risk with any annuity).
With all due respect, I'm not so sure this can or should be ignored (presuming for the sake of argument that hitting the lottery is a serious enough topic to have a serious discussion about). Illinois is already issuing IOUs for many of their lottery winners. I think some other state finances are only going to get worse. Plus, who knows what black swan events down the road are going to cause reallocation of spending priorities; my guess is that disgruntled lottery winners getting shafted (at least in part) on winnings won't make the loudest, largest or most effective constituency.

Also, tax rates on the high end could easily go up in the future.

There is always risk to any course of action, but I don't think the Times' analysis was as even-handed as it could have been.
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Re: Powerball math: annuity is better?

Post by Alex Frakt »

Note - We've been locking Powerball speculation threads, but we'll let this thread run as long as it sticks to math issues.
greg24 wrote:Best return is to not play.
Normally true, but thanks to the rollover prizes, my rough estimate is that you now have a positive expected return even after taxes and the likelihood of a split pot.

[googles...]

Not quite. Someone has done the math: http://thefederalist.com/2016/01/12/wit ... ll-ticket/ . The break even point is around a $1.4 billion lump-sum payout (not the headline annuity payout). My mistake is that I thought a ticket cost $1, apparently it is $2.
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Re: Powerball math: annuity is better?

Post by mattshwink »

westie wrote:annuity is a bad idea in most cases....

http://finance.yahoo.com/news/taxes-1-4 ... 22750.html
Yahoo is mostly talking about estate taxes (and state taxes). Honestly, I don't care very much about those....

The "problem" with the lump sum is the amount of taxes paid (39.6% for most of it) plus probably the 3% medicare tax, and state/local taxes.

By taking the annuity you would shelter a small amount in taxes this year (my example, married filing jointly with 1 child) = $24,750
Taxed at 10%= Next $18,550
Taxed at 15%= Next $18,551<$75,300
...
Taxed at 35%= up to $466,950

So I would essentially pay less tax on $500,000 per year. So there is a return on this money. Could you do better yourself? Maybe....
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Re: Powerball math: annuity is better?

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Re: Powerball math: annuity is better?

Post by nisiprius »

There's simply no way to answer the question because you don't know what inflation (or taxes, if you also consider taxes) are going to be, nor what interest rates are going to be.

Inflation doesn't actually come into it, because even though they say that the payment is "increased by 5% each year to keep up with the cost of living" it is not actually tied to the cost of living at all.

A straightforward answer to a not-very-interesting question is to calculate the net present value of the payouts assuming various interest rates.

In other words, let's suppose that you put the $930 million into a bank account that pays X% interest every year, and each year you withdraw from the bank account the exact number of dollars the annuity would pay. What interest rate does the bank account need to have in order for the money to last exactly 30 years, leave nothing at the end, and pay out exactly $1.5 billion?

When I fiddled with the figures in Excel, the answer I got is 2.84%.

In other words, if you know of an essentially-zero-risk investment, like a bank account or Treasury bills, that pays more than 2.84% per year for the next thirty years, then you will get more money by taking the $930 million lump sum and putting it into that account. If you can't get more than 2.84%, then you will get more money from the annuity.

Inflation doesn't come into it. In year Y, the lottery would have paid $X on the annuity, and you are taking the same $X out of the bank account. Inflation affects them both the same way. If inflation stays under 5%, either way, if inflation says less than 5% you enjoy a gradually increasing lottery-based-standard-of-living, if it doesn't you don't.

Taxes definitely come into account but I'm not enough of a tax expert to figure it out and I don't want to do that much work, but let's just say that unless you can somehow shelter the $930 million and only pay taxes on the money as you withdraw it, then taxation would weigh on the side of the annuity.

Here's what the drawdown looks like if you want to check my work. The interest rate is actually 2.84307453365% annual interest. The payouts ought to increase by 5% every year, ought to total exactly $1.5 billion, and in the "remaining" column I first subtracted the payout, assumed to occur at the beginning of the year, and then increased the remainder by 2.84307453365%, the earnings for the year.

Code: Select all

Year            Payout          Remaining
                                $930,000,000.00
2016            $22,577,152.62  $933,221,555.27
2017            $23,706,010.25  $935,373,749.85
2018            $24,891,310.76  $936,368,133.45
2019            $26,135,876.30  $936,110,838.65
2020            $27,442,670.12  $934,502,281.82
2021            $28,814,803.62  $931,436,848.25
2022            $30,255,543.80  $926,802,560.61
2023            $31,768,320.99  $920,480,730.15
2024            $33,356,737.04  $912,345,589.44
2025            $35,024,573.90  $902,263,905.91
2026            $36,775,802.59  $890,094,575.18
2027            $38,614,592.72  $875,688,193.00
2028            $40,545,322.36  $858,886,604.92
2029            $42,572,588.47  $839,522,432.36
2030            $44,701,217.90  $817,418,574.00
2031            $46,936,278.79  $792,387,681.12
2032            $49,283,092.73  $764,231,605.70
2033            $51,747,247.37  $732,740,819.68
2034            $54,334,609.74  $697,693,804.13
2035            $57,051,340.23  $658,856,406.65
2036            $59,903,907.24  $615,981,165.39
2037            $62,899,102.60  $568,806,598.07
2038            $66,044,057.73  $517,056,454.09
2039            $69,346,260.61  $460,438,927.97
2040            $72,813,573.65  $398,645,832.06
2041            $76,454,252.33  $331,351,726.49
2042            $80,276,964.94  $258,213,004.15
2043            $84,290,813.19  $178,866,928.48
2044            $88,505,353.85  $92,930,621.54
2045            $92,930,621.54  $0.00
                                
                $1,500,000,000.00
Last edited by nisiprius on Tue Jan 12, 2016 3:25 pm, edited 3 times in total.
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Re: Powerball math: annuity is better?

Post by randomguy »

mattshwink wrote:
westie wrote:annuity is a bad idea in most cases....

http://finance.yahoo.com/news/taxes-1-4 ... 22750.html
Yahoo is mostly talking about estate taxes (and state taxes). Honestly, I don't care very much about those....

The "problem" with the lump sum is the amount of taxes paid (39.6% for most of it) plus probably the 3% medicare tax, and state/local taxes.

By taking the annuity you would shelter a small amount in taxes this year (my example, married filing jointly with 1 child) = $24,750
Taxed at 10%= Next $18,550
Taxed at 15%= Next $18,551<$75,300
...
Taxed at 35%= up to $466,950

So I would essentially pay less tax on $500,000 per year. So there is a return on this money. Could you do better yourself? Maybe....
The difference in tax percentage between 40 million/year and a lump sum of 600 million is pretty small. With a smaller winning (something like 10 million) your logic works a lot better.

If you take any sort of risk with the portfolio, you are likely to beat the annuity over 30 years. I would say the annuity might be safer (i.e. less chance to blow through it all in 6 years) but it is pretty easy to get advances against income streams. There is also some flexibility in the lump sum where you can avoid taxes on gains (i.e. you donate appreciated stock) and the use of munis (a 1.8% muni is giving you the same yield as a 3% taxable) which can also change the numbers. Getting the lump sum also gives you more time on working on getting the money out of your estate and into trusts to avoid the estate tax.

In the end this doesn't really matter. The difference isn't enough to change your life either way.
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Re: Powerball math: annuity is better?

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Re: Powerball math: annuity is better?

Post by Rodc »

It is really not a math problem, it is a behavioral problem.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Powerball math: annuity is better?

Post by nisiprius »

Notice, by the way, that I'm just assuming that there's no difference in the date on which the lump sum or the first annuity payment would show up as "available funds" in your bank account.

I assume by the way--just my guess--is that the annuity payments are in fact calculated with the intention of being equitable and fair. It wouldn't surprise me if they are based on the actual yields available today for Treasuries maturing in 1, 2, 3, ... 30 years.
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Re: Powerball math: annuity is better?

Post by Epsilon Delta »

Alex Frakt wrote:Note - We've been locking Powerball speculation threads, but we'll let this thread run as long as it sticks to math issues.



Not quite. Someone has done the math: http://thefederalist.com/2016/01/12/wit ... ll-ticket/ . The break even point is around a $1.4 billion lump-sum payout (not the headline annuity payout). My mistake is that I thought a ticket cost $1, apparently it is $2.
If the lump sum cash payout (not the annuity value) increases to $1.4 billion, and the number of tickets sold hovers around 500 million, the total expected payout of a $2 Powerball ticket will be $2.01, making the purchase of a ticket a rational decision in pure mathematical terms.
I have highlighted the key part of this quote. With larger prizes the number of tickets sold increases in a way that makes it unlikely to every result in a positive expected value, unless the number of tickets sold is limited by the ability to sell them. But at that point you should look at the cost of standing in line to get some of the limited supply of tickets and the expected value still never goes positive.
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Re: Powerball math: annuity is better?

Post by nisiprius »

Rodc wrote:It is really not a math problem, it is a behavioral problem.
I can think of so many things I could do with $930 million that I couldn't do with just $22 million. :(

Quite seriously, if I were running the lottery, I'd create a third option--one that pays out, oh, I dunno, 10% as a lump sum immediately and then the rest as an annuity. So you can buy the yacht right away, and then operate it later.

I assume the annual cost of operating a yacht is less than the cost of buying it? I wonder whether it is?
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Re: Powerball math: annuity is better?

Post by rbaldini »

Epsilon Delta wrote:
Alex Frakt wrote:Note - We've been locking Powerball speculation threads, but we'll let this thread run as long as it sticks to math issues.



Not quite. Someone has done the math: http://thefederalist.com/2016/01/12/wit ... ll-ticket/ . The break even point is around a $1.4 billion lump-sum payout (not the headline annuity payout). My mistake is that I thought a ticket cost $1, apparently it is $2.
If the lump sum cash payout (not the annuity value) increases to $1.4 billion, and the number of tickets sold hovers around 500 million, the total expected payout of a $2 Powerball ticket will be $2.01, making the purchase of a ticket a rational decision in pure mathematical terms.
I have highlighted the key part of this quote. With larger prizes the number of tickets sold increases in a way that makes it unlikely to every result in a positive expected value, unless the number of tickets sold is limited by the ability to sell them. But at that point you should look at the cost of standing in line to get some of the limited supply of tickets and the expected value still never goes positive.
Even if the expected value return were in fact positive, that doesn't necessarily mean playing is "rational". First, there are opportunity costs: if you can expect a better return elsewhere, it is irrational to play here. Second, there is no rule of human behavior that says playing to maximize expected payoff is necessarily rational. If the powerball were in fact the highest expected return on your investment of all choices, then you should presumably put all your money there - in which case, by far the most likely outcome is to lose all your money. Similarly, we don't put *all* our money in stocks just because their expected return is greater than bonds.

Sorry if that's a bit pedantic.
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Re: Powerball math: annuity is better?

Post by westie »

If you're over 40, you're making a bet on your mortality if you take the annuity.
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Re: Powerball math: annuity is better?

Post by nisiprius »

westie wrote:If you're over 40, you're making a bet on your mortality if you take the annuity.
I don't think it's a life annuity (that is, one that stops with the death of the annuitant.) The word "annuity" is really confusing because it basically means any stream of annual payments. I think the Powerball annuity continues for 30 years no matter what. So you're only making a bet on your mortality in terms of your personal enjoyment of the money.

Yes, here it is, I'm right. It's not like an SPIA, and it's not like a variable annuity. It pays so many dollars each year for 30 years, period, no matter what. $22,577,152.62 the first year, $23,706,010.25, and on. It will always pay out $1.5 billion, total... you just can't be sure if it will pay it all to you.

http://www.powerball.com/pb_contact.asp
WHAT HAPPENS IF AN ANNUITY PRIZE WINNER DIES?

The estate will handle the lottery prize. A lottery annuity prize is just like any other asset. You can pass any remaining annuity payments on to your heirs or to anyone else. The Powerball game will even cash out an annuity prize for an estate. This may make it easier for the estate to distribute the prize. It also may be necessary to cash out the annuity to pay Federal estate taxes. We will sell some or all of the securities at competitive bid or will even just transfer the securities to the estate. We do not charge a fee of any kind. We often hear people complain that the jackpot should not go back to "the state" when a winner dies. It does not. I think that this misunderstanding may come from the response that the prize "goes to the Estate" and some people hear "goes to the State."
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Re: Powerball math: annuity is better?

Post by Epsilon Delta »

rbaldini wrote:
Epsilon Delta wrote:
Alex Frakt wrote:Note - We've been locking Powerball speculation threads, but we'll let this thread run as long as it sticks to math issues.



Not quite. Someone has done the math: http://thefederalist.com/2016/01/12/wit ... ll-ticket/ . The break even point is around a $1.4 billion lump-sum payout (not the headline annuity payout). My mistake is that I thought a ticket cost $1, apparently it is $2.
If the lump sum cash payout (not the annuity value) increases to $1.4 billion, and the number of tickets sold hovers around 500 million, the total expected payout of a $2 Powerball ticket will be $2.01, making the purchase of a ticket a rational decision in pure mathematical terms.
I have highlighted the key part of this quote. With larger prizes the number of tickets sold increases in a way that makes it unlikely to every result in a positive expected value, unless the number of tickets sold is limited by the ability to sell them. But at that point you should look at the cost of standing in line to get some of the limited supply of tickets and the expected value still never goes positive.
Even if the expected value return were in fact positive, that doesn't necessarily mean playing is "rational". First, there are opportunity costs: if you can expect a better return elsewhere, it is irrational to play here. Second, there is no rule of human behavior that says playing to maximize expected payoff is necessarily rational. If the powerball were in fact the highest expected return on your investment of all choices, then you should presumably put all your money there - in which case, by far the most likely outcome is to lose all your money. Similarly, we don't put *all* our money in stocks just because their expected return is greater than bonds.

Sorry if that's a bit pedantic.
Not pedantic, that's why I never mentioned rational, just positive expected value. :twisted:

Pedantically, There are also cases where it is rational to accept a negative expected value, at least in dollar terms. You need a $1,000,000,000 surgery to save your life or similar. It's hard to envision in terms of the powerball lottery, but it's believed to be what happened in the case of the London whale.
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Re: Powerball math: annuity is better?

Post by Jags4186 »

I'd take the annuity.

Let's face it, if I won the powerball I'm most definitely NOT putting it in the stock market. I'm not going to buy bonds either. I'm probably going to buy TIPS. What do they pay, 2%-3%? A 0 risk guaranteed 5% sounds pretty good to me if I'm not looking to build my portfolio.
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Re: Powerball math: annuity is better?

Post by westie »

nisiprius wrote:
westie wrote:If you're over 40, you're making a bet on your mortality if you take the annuity.
I don't think it's a life annuity (that is, one that stops with the death of the annuitant.) The word "annuity" is really confusing because it basically means any stream of annual payments. I think the Powerball annuity continues for 30 years no matter what. So you're only making a bet on your mortality in terms of your personal enjoyment of the money.

Yes, here it is, I'm right. It's not like an SPIA, and it's not like a variable annuity. It pays so many dollars each year for 30 years, period, no matter what. $22,577,152.62 the first year, $23,706,010.25, and on. It will always pay out $1.5 billion, total... you just can't be sure if it will pay it all to you.

http://www.powerball.com/pb_contact.asp
WHAT HAPPENS IF AN ANNUITY PRIZE WINNER DIES?

The estate will handle the lottery prize. A lottery annuity prize is just like any other asset. You can pass any remaining annuity payments on to your heirs or to anyone else. The Powerball game will even cash out an annuity prize for an estate. This may make it easier for the estate to distribute the prize. It also may be necessary to cash out the annuity to pay Federal estate taxes. We will sell some or all of the securities at competitive bid or will even just transfer the securities to the estate. We do not charge a fee of any kind. We often hear people complain that the jackpot should not go back to "the state" when a winner dies. It does not. I think that this misunderstanding may come from the response that the prize "goes to the Estate" and some people hear "goes to the State."
Maybe I misunderstood, referring to estate taxes, wouldn't your heir have to pay in taxes (40%) of the amount they received over the 5M+ threshold every year they collected it?
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Re: Powerball math: annuity is better?

Post by nisiprius »

With estate taxes, you might well be right.
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Re: Powerball math: annuity is better?

Post by nisiprius »

Clearly we need to round up some small children and ask them to choose between getting 930 marshmallows today and getting a total of 1,500 marshmallows: 23 today, 24 tomorrow... 92 on day #30.
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Re: Powerball math: annuity is better?

Post by rec7 »

Rodc wrote:It is really not a math problem, it is a behavioral problem.
I think you hit the nail on the head. This would be the best choice for most people I don't know about Bogleheads. They are not the average bear. But 5% sounds good to this Boglehead.
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Re: Powerball math: annuity is better?

Post by autolycus »

westie wrote:
nisiprius wrote:Maybe I misunderstood, referring to estate taxes, wouldn't your heir have to pay in taxes (40%) of the amount they received over the 5M+ threshold every year they collected it?
The estate would pay 40% on all assets over the 5M+ estate exemption ($10M+ for a couple). Those assets would include a right to a future income stream in the form of the remaining payments left on the lottery annuity. The remark about the lottery allowing an estate to cash out the annuity is basically saying that the lottery has a system in place to prevent an estate from being in an impossible situation. For purposes of illustration, I will use highly simplistic numbers that are not valid for Powerball or MegaMillions, but the estate tax issue is still covered validly:

AutoMillions jackpots are paid over 10 years
Linus wins a jackpot worth $1 billion, or $100 million/year for the 10 years, all after taxes (for simplification)
Linus dies after receiving just 1 payment
Linus is very cautious and has simply deposited all of the first payout into a money market fund that earned nothing yet
Remaining payouts are worth $900 million
At this point, the estate is liable for 40% of the assets minus the exemption, or $100 million + $900 million - $5 million-ish
Of course, the estate doesn't have anywhere near $400 million in liquid assets because Linus only actually got $100 million before he died

The IRS will still expect immediate payment on the estate tax liability. So what do the heirs do? There are usually several options:
Enter into a payment plan with the IRS with portions of each annual payout going to the IRS.
Borrow money against the future payments.
Sell the future payment stream for immediate cash.
"Cash out" the annuity with the lottery.
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Re: Powerball math: annuity is better?

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Re: Powerball math: annuity is better?

Post by VictoriaF »

Annuity is better because it's 3 commas, and the lump sum is only 2.

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Re: Powerball math: annuity is better?

Post by lee1026 »

Why is everyone using 5% as an interest rate? The payment will increase by 5% a year; that have nothing to do with the break even rate of return needed on the lump payment to come out ahead of the annuity.
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Re: Powerball math: annuity is better?

Post by dm200 »

Apparently, whether you have to choose between lump sum and annuity differs in different states. Some states you can choos after you win; other states you must choose when you buy the ticket.

Also, in some states (not sure which) you can collect "anonymously" (which is what I would like to do). Have hundreds of millions of dollars - and just live my same old frugal life (in public anyway). I would probably set up a "business" to (legally of course) appear to be very successful in that business.
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Re: Powerball math: annuity is better?

Post by gvsucavie03 »

greg24 wrote:Best return is to not play.
+1
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Re: Powerball math: annuity is better?

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Re: Powerball math: annuity is better?

Post by Epsilon Delta »

VictoriaF wrote:Annuity is better because it's 3 commas, and the lump sum is only 2.

Victoria
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Re: Powerball math: annuity is better?

Post by jjface »

lee1026 wrote:Why is everyone using 5% as an interest rate? The payment will increase by 5% a year; that have nothing to do with the break even rate of return needed on the lump payment to come out ahead of the annuity.
Yes I was thinking the same. They have just set the stream of income to rise by 5%. It is not as if you are getting more money by taking it as an annuity as the lump sum would take into account this increase. If they didn't have a payout pattern with a 5% increase you would simply have $50million throughout the 30 years (which would actually be worth more as a lump sum I reckon as you are getting more in earlier years - the 5% increases works to the lottery's advantage yet they spin it to make it sound good. I think anyway!). What you really need to compare to is the interest rate on the government securities they are using and factoring in the slight tax benefit to having it spread over 30 years.
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Re: Powerball math: annuity is better?

Post by Rodc »

nisiprius wrote:
Rodc wrote:It is really not a math problem, it is a behavioral problem.
I can think of so many things I could do with $930 million that I couldn't do with just $22 million. :(

Quite seriously, if I were running the lottery, I'd create a third option--one that pays out, oh, I dunno, 10% as a lump sum immediately and then the rest as an annuity. So you can buy the yacht right away, and then operate it later.

I assume the annual cost of operating a yacht is less than the cost of buying it? I wonder whether it is?
Opens up a new line of thought: with a guaranteed income of $22M a year you could lease a yacht. And given interest rates, depreciation and such is it better to take lump sum and pay cash or annuity and lease? :happy

I have often thought some version of your new option would really be nice.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Powerball math: annuity is better?

Post by mikep »

Maybe lump sum is better in CA, where as of today the lottery winnings are surprisingly state tax free. It would be a big mistake to take the annuity then CA changes their laws to charge the winner 13.3% tax on it for 30 years.
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Re: Powerball math: annuity is better?

Post by gas_balloon »

Considering the rule of 72, I would expect my money to double in approximately 14 years. At a 62% payout, the lumpsum is a no-brainer from a pure financial pov. You could easily expect to quadruple the money over 30 years with a 40/60 allocation or 5% annualized return and re-investing dividends.

If the reasons for choosing an annuity are non financial, such as needing more time to figure out a plan -- thats a different discussion altogether.
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Re: Powerball math: annuity is better?

Post by letsgobobby »

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lee1026
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Re: Powerball math: annuity is better?

Post by lee1026 »

And more importantly, you will be paying taxes on the earnings from the lump sum. Getting this kind of money into an IRA can be tricky.
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Re: Powerball math: annuity is better?

Post by Rodc »

walletless wrote:Considering the rule of 72, I would expect my money to double in approximately 14 years. At a 62% payout, the lumpsum is a no-brainer from a pure financial pov. You could easily expect to quadruple the money over 30 years with a 40/60 allocation or 5% annualized return and re-investing dividends.

If the reasons for choosing an annuity are non financial, such as needing more time to figure out a plan -- thats a different discussion altogether.

Need to remember that compounding works on the annuity payments as well. First payment compounds for 30 years, next year for 29 years etc, if you want a fair comparison.

In both cases need to also account for any spending along the way.

Likely lump still wins.

On the other hand a fair comparison also equalizes risk and putting it all in the stock market is much more risky so of course the average result is higher.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Powerball math: annuity is better?

Post by nisiprius »

Epsilon Delta wrote:
VictoriaF wrote:Annuity is better because it's 3 commas, and the lump sum is only 2.

Victoria
If all you want is the commas move to India. You'll get an extra one for the crore and one more for the Rupee.
Wow! Thanks for making me Google that. Wikipedia:Indian Rupee, numeral system, Indian comma placement.

If I've got it right, USD $1.5 billion = 100,237,500,000 rupees which would be written ₹1,00,23,75,00,000.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Powerball math: annuity is better?

Post by nisiprius »

lee1026 wrote:Why is everyone using 5% as an interest rate? The payment will increase by 5% a year; that have nothing to do with the break even rate of return needed on the lump payment to come out ahead of the annuity.
Everyone isn't using it, and the breakeven rate of return to match the annuity is 2.84% as I showed above.

The 5% rate of increase is some kind of arbitrary choice that someone pulled out of thin air, probably because it is easier and less risky to provide that then a true inflation-indexed increase; it seems like a pretty good one, but it's just someone's tasteful choice.

I think it's quite likely that the relationship between annuity and lump sum is calculated by actuaries in some way based on Treasury rates in a reasonably fair way; that is, in such a way that the Powerball people don't care which option the winner elects and have no motivation to "sell" one over the other.

But, yes, you are right, in some vague kind of way people seem to be thinking that the fact that the payments increase by 5%/year, and that the average rate of inflation--both since 1913 when they started to calculate it and over the last thirty years or so since Volcker got tough--has been in the general ballpark of 3%, that it somehow makes the annuity a good deal. It doesn't. It's not as if you had a choice between taking the Powerball annuity of about $23 million the first year, increasing 5% per year, versus buying one that starts at the same $23 million the first year and only increases according to the CPI.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Powerball math: annuity is better?

Post by Dulocracy »

greg24 wrote:Best return is to not play.
+1 I came here to say this.

To OP: I do not think you can ignore the risk that whatever entity is in charge might someday fail to pay. That is a part of the math one must do in consideration of this question.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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Re: Powerball math: annuity is better?

Post by gas_balloon »

Dulocracy wrote:
greg24 wrote:Best return is to not play.
+1 I came here to say this.

To OP: I do not think you can ignore the risk that whatever entity is in charge might someday fail to pay. That is a part of the math one must do in consideration of this question.
Yes, additionally the state & localities that do not have tax currently, such as California, may start doing so. Annuity is not risk-free, like several folks on this thread seem to suggest. Is probably low-risk compared to investing in stock market, but not risk-free.
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Re: Powerball math: annuity is better?

Post by alex_686 »

nisiprius wrote:
westie wrote:If you're over 40, you're making a bet on your mortality if you take the annuity.
I don't think it's a life annuity (that is, one that stops with the death of the annuitant.) The word "annuity" is really confusing because it basically means any stream of annual payments. I think the Powerball annuity continues for 30 years no matter what. So you're only making a bet on your mortality in terms of your personal enjoyment of the money.

Nisprius, first, +1 on the Excel work. I think you nailed the issue perfectly.

Second, the article refers to the payments as a "certainty annuity" - it pays for exactly 30 years and stops, even if you die the next day. So once again you have hit it on the noise.

FYI, I am playing the lotto because it is the rational thing to do. I would be very sad if the office pool won and I was the only one that showed up for work. A small insurance payment to avoid regret.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Powerball math: annuity is better?

Post by gvsucavie03 »

FYI, I am playing the lotto because it is the rational thing to do. I would be very sad if the office pool won and I was the only one that showed up for work. A small insurance payment to avoid regret.
:confused the only assurance about playing the lotto is that you have a near 100% chance of not winning.
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Re: Powerball math: annuity is better?

Post by Twins Fan »

I don't play the lotto, so....

But, I think I would take the annuity. Math and taxes and whatever be darned. You're getting a lot of money and paying a lot of taxes either way.

I would just get more of a kick out of becoming a $22 millionaire each and every year. That way just in case I were to go total Rock Star and blow it all in one year, there's always next year to get my head right. :D
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Re: Powerball math: annuity is better?

Post by Dick D »

My fantasy would be to take the annuity. I think that it would be easier to deal with a 23 million check annually than the big number all at once. Who cares if you could get more one what or another. So what if the whole system goes belly up after your first check. For a $2 investment, not bad. Just keep in mind that you are more likely to be struck by lightning and run over by a bus at the same time.
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Re: Powerball math: annuity is better?

Post by scotthal »

Heck - I'd go with the lump sum. Figure Oregon would collect it's 9.9% in either case (lump sum, or annuity); but I can change state of residence to minimize dings to investment returns & estate taxes.

Comic thought: Schrödinger's ticket - it could be a winner - I haven't checked the number, & nobody has (as yet) claimed the prize...
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Re: Powerball math: annuity is better?

Post by ponyboy »

I just cant believe I didnt win the powerball. I was so certain that I was going to win. It appears 3 tickets were sold in different states. Im still in shock my numbers werent picked.
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Re: Powerball math: annuity is better?

Post by sesq »

scotthal wrote: Comic thought: Schrödinger's ticket - it could be a winner - I haven't checked the number, & nobody has (as yet) claimed the prize...
Bravo. I buy a single ticket somewhat often. I usually don't check my tickets for a couple months unless there is a press report that says a winning ticket was sold in my state. Never thought of it that way, may need to borrow that.
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