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22/08/2022
With no less than 300 words, post an initial reply to the question below
Online Forum Discussion:
Many American families play the lottery. Winning the lottery offers an easy path to financial security. But for most that play, this dream remains unrealized, deferred, always just out of reach. But imagine you win a major lottery prize. The choice is $500,000 cash today or $50,000 a year paid over 25 years. Which is a better choice? What should be taken into consideration? (Support your answer with information from this week’s information or cited outside sources).
Post by Mariscela Jaimes
Winning the lottery I’m sure in itself is satisfying, I would love to just win something But many are blessed in many other ways.
So when deciding between the two choices, either $500,000 cash today or $50,000 a year paid over 25 years you have to think about if over 25 years. Lets just say cost of capital is 8%, then my PV will be higher than one time payment so I would certainly go with the year amount.
To make it easy for me; I like to think about interest rate, will my money grow over time or should I just take the leap and cash all of it right now. If I cash the money right now I’m taxed on that $500,000. But for happiness’s sake, lets say I’m not taxed:
PRESENT VALUE METHOD:PV of the 25 instalments = 50000*PVIFA(3,25) = 50000*17.4131 =$ 870,655As the PV of the deferred payment is more, it is preferred.
Soooo since I care about interest rate lets see if I get this right, if the interest rate is 3% over 25 years
FUTURE VALUE METHOD:FV of the lump sum = 500000*1.03^25 =$ 1,046,889FV of the deferred payment = 50000*FVIFA(3,25) =50000*36.4593 =$ 1,822,965As the FV of the deferred payment is more, it should be preferred.
I personally would choose the $50,000/year. I would continue to work and watch the money grow with interest being paid. That’s personally what I say now of course.
There’s a lot that people take in consideration though, for me I have to remember that I am married and filing jointly with my spouse. So in reality if I won between $400,001 – $600,000 I (we) would be taxed at 35% of that money. That’s a huge chunk that I rather want to take in instalments.
Resources:
Berk, J., DeMarzo, P., & Harford, J. (2018). Fundamentals of Corporate Finance [EBook]. Retrieved from https://aurora.learninghouse.com/login/index.php
Simon, J. C. (2019, October 31). How Taxes on Lottery Winnings Work. Retrieved November 2, 2020, from https://smartasset.com/taxes/how-taxes-on-lottery-winnings-work
Post by Francisca Villalobos
Hello,
There are some things to consider when deciding whether to take a lump sum or annuity payment when you win the lottery. If you choose to take the annuity option, you would get payments every year. This would be a good option if you tend to be a spender as you would have guaranteed income for a set number of years. However, things could happen that could cause an issue with the payments. You could experience tax changes and have to pay more taxes in the long run, or you could die and not get to have all the money. If you decided to take the lump sum, you could end up paying less in taxes. You could also invest the money and possibly earn more in interest if you have a well selected investment portfolio. However, lump sum payments have their drawback as well. You could spend it all and end up bankrupt. (Herron, 2020) I would personally take the lump sum. I think it is a good idea to invest the money and not spend it frivolously. When you take into consideration the fact that you could end up paying more in taxes and possibly not live long enough to get the entire payout. I would want to get as much money from the lottery as possible and pay off my debt and invest as much as I could. However, I’m also the type of person who would probably still work for a while if I won while I got everything sorted out and figured out what I wanted to do. I would also want to keep working while I figured out what I wanted to do about my health insurance options as well. There is a lot to consider when someone wins the lottery. I tend to be rather frugal so I think the lump sum payment would work for me. If someone was a spender then I would recommend speaking to a financial planner before deciding what kind of payment to take.
Thank you,
Francisca
References
Herron, J. (2020, February 12). Winning the lottery: Should you take the annual payments or lump sum? Retrieved from usatoday.com: https://www.usatoday.com/story/money/2020/02/12/winning-lottery-take-lump-sum-annual-payments/4736439002/
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