Lotteryfilter: should I take the yearly payout, or the all-at-once option?

November 24, 2004 1:01 PM

I know that I'll never win the lottery. But if I did should I take the "yearly payout" that grosses more or the smaller but all at once option? It's really not that clear with things like the interest or inflation etc. So which is best?
posted by Napierzaza to Work & Money (10 answers total)

It depends...if you die, can you pass on the inheritance?

If not, take it all now...because you could die any minute.

...but I hear after death can be better than winning the lottery anyway so happy dying. seriously.
posted by mic stand at 1:03 PM on November 24, 2004

Always take the lump sum payout. It's all about the present value of the dollar. A dollar today is better than a dollar tomorrow. (or a dollar twenty years from now).
posted by contessa at 1:06 PM on November 24, 2004

More likely than not, take the lump sum and invest it. Even if conservatively invested you can live off the interest of this alone if by 'win the lottery' the payout > [insert local currency equivalent of ~$600,000].

A simple calculation is to take the lump payout and compound it at 6% annually over the course of the payout period. Take which ever turns out greater at the end. Basically what contessa said.
posted by Fezboy! at 1:10 PM on November 24, 2004

The last time I looked at the situation here with the lottery here in Oregon the "over 20 years option" worked out to be the lump sum ammount with an 8% return rate over 20 years. So if you think you can beat an 8% yearly interest rate then take the lump sum. Personally, I am confident I could beat 8% using the market, real estate, etc, and would always take the lump sum. If you're not so good with money, or are worried you'd loose control and spend it all then take the 20 year option to force you to still have something left 20 years from now.

pwb.
posted by pwb503 at 1:53 PM on November 24, 2004

pwb, please don't put pwb at the end of your posts. This is bad form.

A question for you, since you did the math: Was the 8% return rate over the 20 year term compounded interest or simple interest? Because 20 years is enough time to see a big difference between a single 8% interest "payment" and a year-over-year compounded interest rate.

In general, always take the lump sum. And then, before you do anything else, before the first bottle of Cristal is popped, before the first cousin asks you to fund his bakery, before anything, hire a money manager at 1% a year. Remember, more money, more problems.
posted by zpousman at 2:09 PM on November 24, 2004

i've always heard you should take the yearly payout. It serves as a curb on excess (many lottery winners throw away their money, or end up bankrupt, or just don't know how to handle such a large sum at once) and you end up with a bigger portion of the actual jackpot. They take out more, i've heard, if you take it all at once, and you lose out on tax deductions/shelters, if you buy real estate 6 months later, etc.
posted by amberglow at 2:47 PM on November 24, 2004

zpousman, thank you. That's been irritating me for ages now but I've been biting my tongue.
posted by ook at 2:48 PM on November 24, 2004

Disadvantages of the lump sum:

1) You'll pay a larger chunk of the money in taxes because you'll be in a higher bracket.
2) It's easier to spend it all at once on stupid things.

Advantages of the lump sum:

1) You get a metric buttload of money all at once.
2) Why would you care if there are any other advantages?

One piece of advice I picked up somewhere: never ever claim big lottery winnings yourself. It's too easy for your name to be made public. People will come to your property and intentionally fall down and try to sue you for damages, and stupid things like that. Instead, what you should do is consult a lawyer about setting up a blind trust and have the trust claim the winnings.
posted by kindall at 3:28 PM on November 24, 2004

If you win at age 85, your chances of cashing that last 20-year check at age 105 are not great. Take the lump sum.
posted by gimonca at 8:18 PM on November 24, 2004

Take the yearly payout. All of the arguments about present- and future-value above are absolutely correct, but work off of the assumption that you are the one collecting the money. You'd be better off taking the yearly payout, then turning around and selling it to a financial institution. They view it as guaranteed operating capital (which they can then lend out and make a profit off of), and can then turn around and pay you a lump sum of greater value than the lottery will pay you, but lesser value than they will lend the money out at.

Everyone wins in the end--especially the tax man!
posted by NotMyselfRightNow at 1:37 PM on November 25, 2004