Quote:
|
Originally Posted by Dirkadirkastan
The lottery company pays the same amount of money no matter what. You can either get that lump sum, or they will divide the money and place it in bonds that all mature to the same number of dollars each year. The bonds that mature sooner get more of the initial money because they have less time to mature. The interest on the bonds is set at a constant rate and is not affected by the market, so the lottery company is indifferent about which method of payment you choose.
The market rate does impact the winner though, because that will determine the purchasing power of the dollar amount he receives each year. If the market rate is slower than the rate of interest on the bonds, then the bonds increase in value each year and the winner made the correct decision to receive yearly payments. But if the reverse is true, then the lump sum would have been better. Since the rate of the bonds is supposed to be an estimate of the market value, either situation may arise. It's a risk either way.
This is NOT a question of whether one should receive $126M now, or $126M divided up over a long period of time. That question is just too easy.
|
The choice was $126MM in 26 annual installments, or $71.5MM lump sum. The lottery company is indeed indifferent as explained above. This is equivalent to about a 5.25% discount rate. So you have to figure, can I get a better return on my money over time than 5.25%. The S&P 500 has averaged 11.5% annual rate of return over the last 35 years--so, I daresay, yes. Is it riskier? Of course. Not suggesting you put all $71MM (call it $44MM after tax) in an index fund...but in theory you could and you'd be better off in the long run.
Additionally, you could party like a rock star now with the lump sum.