Lump sum of $390K or $25K per year for life?

[Rob Base 2.0]

which would you choose? She is 50 and chose $390K over the $25 K per year.

www.cnn.com/2018/01/24/us/michigan-woman-lottery-win-trnd/index.html

[jd2005]

Lump sum.  Invest it...even if you use some of the principal every year, you can pass the remainder down to your heirs after you die.  If you take the 25k per year it goes away when you die.

[MJ2.0]

depends on age and health.  $390k would be $25k over 15.6 years.  If she was in good health, $25k/year would be okay - if not, take the lump sum.

[Lizard Queen]

I think she probably made a mistake, after reading the story.  She's planning on buying a house and a car, and putting the rest into savings. I don't know what her taxes will be on that, but am guessing not a lot will be left over after the house and car are purchased.  She's already on the verge of homelessness, so I'm guessing that she is not very financially savvy.  IMO, in that case, a sure thing is better than depending on smart investing, which she isn't doing.

[MJ2.0]

Jan 24, 2018 13:33:08 GMT -5 Lizard Queen said:

I think she probably made a mistake, after reading the story.  She's planning on buying a house and a car, and putting the rest into savings. I don't know what her taxes will be on that, but am guessing not a lot will be left over after the house and car are purchased.  She's already on the verge of homelessness, so I'm guessing that she is not very financially savvy.  IMO, in that case, a sure thing is better than depending on smart investing, which she isn't doing.

I didn't read the article.  didn't realize she was nearly homeless.  In that case, take the lump sum, buy a decent enough home and vehicle, and bank the rest.

[Shooby]

I would take the lump sum and then invest and enjoy it.  At 50, what would you be waiting for.  lol

[jeffreymo]

Jan 24, 2018 13:33:08 GMT -5 Lizard Queen said:

I think she probably made a mistake, after reading the story.  She's planning on buying a house and a car, and putting the rest into savings. I don't know what her taxes will be on that, but am guessing not a lot will be left over after the house and car are purchased.  She's already on the verge of homelessness, so I'm guessing that she is not very financially savvy.  IMO, in that case, a sure thing is better than depending on smart investing, which she isn't doing.

Yea, she is going to be in trouble. I hope her idea of “savings” is at least $150k - the taxes will take up most of this. Then she will need to find a job that pays enough to cover all the expenses of owning a home.

[haapai]

I can't begin to analyze the choice until I know more about how this prize will be taxed at the federal level. 

And crickey! what kind of journo can't figure out whether the ticket cost $2 or $3?

[Deleted]

Jan 24, 2018 13:33:08 GMT -5 Lizard Queen said:

I think she probably made a mistake, after reading the story.  She's planning on buying a house and a car, and putting the rest into savings. I don't know what her taxes will be on that, but am guessing not a lot will be left over after the house and car are purchased.  She's already on the verge of homelessness, so I'm guessing that she is not very financially savvy.  IMO, in that case, a sure thing is better than depending on smart investing, which she isn't doing.

I think she did too.  I'm assuming the lump sum is pre-tax so she's going to lose 40% of that due to it being taxed as unearned income.  Then spend a good chunk of the remainder right away on a house and car.  With her history she probably would have been better with "rent for life" provided instead. 

[hoops902]

The answer to what "I" would do for any of these lottery/annuity payouts is always that I'd take the lump sum. The discount rates being applied are always less than what someone can expect to make by taking the lump sum and investing it themselves. That doesn't mean OTHER people shouldn't take the payments, but that's for behavioral reasons (spendthrifts, or will let the money sit not earning any income). I'm not sure it matters what this person does...if they're a spendthrift, then they're just going to sell the payments for even less of a lump sum to some 3rd party.

[Deleted]

I personally would take a lump sum as I have my shit together financially and 25k extra a year vs taking lump sum in one year would have a similar tax impact.

For this person however I would take the 25k a year. Lump sum is gonna be a bitch getting taxed all in one year when 25k per year would likely get taxed at a much lower rate. As someone else said there ain’t gonna be much left over after buying a house and car and taxes, being they are near homeless now I would doubt they will be able to be financially solvent enough to pay the taxes on the home going forward and may lose everything as so many lotto winners do.

[haapai]

Jan 24, 2018 13:53:30 GMT -5 hoops902 said:

The answer to what "I" would do for any of these lottery/annuity payouts is always that I'd take the lump sum. The discount rates being applied are always less than what someone can expect to make by taking the lump sum and investing it themselves. That doesn't mean OTHER people shouldn't take the payments, but that's for behavioral reasons (spendthrifts, or will let the money sit not earning any income). I'm not sure it matters what this person does...if they're a spendthrift, then they're just going to sell the payments for even less of a lump sum to some 3rd party.

Taking the annual payments really doesn't provide that much protection for spendthrifts and folks surrounded by takers.  Sooner or later, they'll land up converting the payments into a lump sum. 

[phil5185]

I think that she made the right choice - but that she is GOING to make a mistake.

Lottery officials claim that many winners pay the tax, buy a new house, buy a new car, maybe 2 or 3 more new cars for family members - and then save that remaining few $1000 "for their future". And on average, they are broke in 7 years.
She should make a small down payment on a house, a small down payment on a car, pay the approx $100,000 taxes, and invest the remaining $250,000 lump in a growth fund. And draw small amounts from the growth fund as required.

[billisonboard]

Jan 24, 2018 13:47:12 GMT -5 haapai said:

...

And crickey! what kind of journo can't figure out whether the ticket cost $2 or $3?

...  $2 for .. ticket ...         payouts ... $3 to ...

[haapai]

My bad!

[hoops902]

Jan 24, 2018 13:59:03 GMT -5 haapai said:

Jan 24, 2018 13:53:30 GMT -5 hoops902 said:

The answer to what "I" would do for any of these lottery/annuity payouts is always that I'd take the lump sum. The discount rates being applied are always less than what someone can expect to make by taking the lump sum and investing it themselves. That doesn't mean OTHER people shouldn't take the payments, but that's for behavioral reasons (spendthrifts, or will let the money sit not earning any income). I'm not sure it matters what this person does...if they're a spendthrift, then they're just going to sell the payments for even less of a lump sum to some 3rd party.

Taking the annual payments really doesn't provide that much protection for spendthrifts and folks surrounded by takers.  Sooner or later, they'll land up converting the payments into a lump sum. 

The kind of person I'd suggest taking the payments would be someone like my brother. He'll spend every dime he has, but he won't spend more than he has. If you give him $25k/year...he'll spend $25k more per year. If you hand him $390k tomorrow, he'll have it spent next week buying a new house and a couple of new cars. He knows how he is, he wouldn't convert it into a lump sum...he actively manages his life to actually make sure he has periodic income and rarely/never falls into lump sums of money.

[Tiny]

Jan 24, 2018 13:33:08 GMT -5 Lizard Queen said:

I think she probably made a mistake, after reading the story.  She's planning on buying a house and a car, and putting the rest into savings. I don't know what her taxes will be on that, but am guessing not a lot will be left over after the house and car are purchased.  She's already on the verge of homelessness, so I'm guessing that she is not very financially savvy.  IMO, in that case, a sure thing is better than depending on smart investing, which she isn't doing.

Yeah, I did a citydata search of Clarkston Michigan and the stats said the average house/condo was $300K.    Sounds like the $390K lump sum isn't going to go very far.

Not that she'd buy a $300K condo/house... Even if she goes with a 200K house, figure 25K for move in expenses (fix ups (paint, window treatments, decorating, new furniture, etc) and 30K for a car - she's got $135K left over...  that's not gonna get her too far maybe 5 years?  If she draws it down 30K a year...  (I'm guessing she's gonna need atleast 10K a year to stay in her 200K house (taxes,insurance, utilities, upkeep)... that leaves  20K  or 1,666 a month for other expenses (will she need to buy health insurance? will she owe income tax?) 

ADDED:  I don't think she'd make mortgage payments for long even if she'd put down a minimum downpayment and then invested the rest of the money.  The invested money isn't going to throw off enough to cover her mortgage payment AND everday life stuff. 

[Tiny]

Jan 24, 2018 13:23:04 GMT -5 Rob Base 2.0 said:

which would you choose? She is 50 and chose $390K over the $25 K per year.

www.cnn.com/2018/01/24/us/michigan-woman-lottery-win-trnd/index.html

To answer what I would choose.... I've got my retirement act together.  I'm 54.   I think I'd take the lump sum $390K and park 1/2 of it in something super safe and the other 1/2 I'd invest.    I'd also start planning my "escape from the rat race" within 12 to 24 months.  When I quit working I'd use 25K each year from the 'super safe' account and whatever else I needed from my non-retirement savings.  until I was old enough to tap my pension/SS and it made sense to tap my 401K/Roth etc...  I'd run down the lottery winnings first - hopefully I could make it to 65 (about 10 years) - when I could tap my other actual 'retirement savings'. 

Yeah, I could accomplish the same thing by taking the 25K per year but I think I'd rather take the money and run.

So, yeah, I'd take the lump sum -- with the intent to either spend every penny of it over 10 years (worse case scenario) OR have some of it left after 10 years (best case scenario) when I actually "retire" and use my own money to finance my life.  

[resolution]

I would take the lump sum as well. I am under the impression that Michigan isn't in the best financial shape, and I vaguely recall reading about a state that wasn't paying out lottery stipends due to a budget crisis.

In her case, I hope that her lump sum lasts throughout the time that she is caring for her mother full time, so she is able to go back to work after it is spent. $390k really isn't that much money, especially if you plan to spend it instead of letting it grow.

[Miss Tequila]

Jan 24, 2018 13:55:40 GMT -5 @aj said:

I personally would take a lump sum as I have my shit together financially and 25k extra a year vs taking lump sum in one year would have a similar tax impact.

For this person however I would take the 25k a year. Lump sum is gonna be a bitch getting taxed all in one year when 25k per year would likely get taxed at a much lower rate. As someone else said there ain’t gonna be much left over after buying a house and car and taxes, being they are near homeless now I would doubt they will be able to be financially solvent enough to pay the taxes on the home going forward and may lose everything as so many lotto winners do.

I agree. I could invest the $390k and make much more than $25k a year. But if she had that ability she wouldn't be on the verge of homelessness. My mom would piss away the $390k so even at 69 years of age I would recommend she take the $25k a year.

[Lizard Queen]

Jan 24, 2018 16:26:26 GMT -5 resolution said:

I would take the lump sum as well. I am under the impression that Michigan isn't in the best financial shape, and I vaguely recall reading about a state that wasn't paying out lottery stipends due to a budget crisis.

In her case, I hope that her lump sum lasts throughout the time that she is caring for her mother full time, so she is able to go back to work after it is spent. $390k really isn't that much money, especially if you plan to spend it instead of letting it grow.

That's not true about Michigan at all. They cut way back on revenue sharing to cities and school funding years ago, so the state has a healthy surplus now. The cities and schools are pinched, but the state is fine. Anyway, I think this is a national lottery game that wouldn't be subject to the state's whims, regardless.

[Deleted]

Jan 24, 2018 16:41:44 GMT -5 Miss Tequila said:

Jan 24, 2018 13:55:40 GMT -5 @aj said:

I personally would take a lump sum as I have my shit together financially and 25k extra a year vs taking lump sum in one year would have a similar tax impact.

For this person however I would take the 25k a year. Lump sum is gonna be a bitch getting taxed all in one year when 25k per year would likely get taxed at a much lower rate. As someone else said there ain’t gonna be much left over after buying a house and car and taxes, being they are near homeless now I would doubt they will be able to be financially solvent enough to pay the taxes on the home going forward and may lose everything as so many lotto winners do.

I agree. I could invest the $390k and make much more than $25k a year. But if she had that ability she wouldn't be on the verge of homelessness. My mom would piss away the $390k so even at 69 years of age I would recommend she take the $25k a year.

Everyone keeps talking about 390K, but I'm pretty sure this gets taxed the same as a bonus check at 39% and then your state tax rate on top of that.  I'm thinking the new house and new car will wipe out the remainder of what is left in most areas. 

[lynnerself]

Jan 24, 2018 16:49:10 GMT -5 minnesotapaintlady said:

Jan 24, 2018 16:41:44 GMT -5 Miss Tequila said:

I agree. I could invest the $390k and make much more than $25k a year. But if she had that ability she wouldn't be on the verge of homelessness. My mom would piss away the $390k so even at 69 years of age I would recommend she take the $25k a year.

Everyone keeps talking about 390K, but I'm pretty sure this gets taxed the same as a bonus check at 39% and then your state tax rate on top of that.  I'm thinking the new house and new car will wipe out the remainder of what is left in most areas. 

It's state tax free. A rough tax calculator got  just over $100000 in federal tax. But still probably not enough for her plans.
How much you want to bet she goes out and buys a nice new car, not something used or cheap.

[Rob Base 2.0]

Sew eye guest eye yam confused.....

Conventional wisdom says you should take $40K a year from $1M nest egg in order for it to last in retirement (4% rule).

 But some of you on here suggest investing the $390K so you can generate (from my interpretation meaning "take out") more than $25K a year.  What happened to the 4% rule?  

[hoops902]

Jan 24, 2018 17:01:57 GMT -5 Rob Base 2.0 said:

Sew eye guest eye yam confused.....

Conventional wisdom says you should take $40K a year from $1M nest egg in order for it to last in retirement (4% rule).

 But some of you on here suggest investing the $390K so you can generate (from my interpretation meaning "take out") more than $25K a year.  What happened to the 4% rule?  

1. The 4% rule applies if you want the money to last forever.

2. If you're already set up for retirement...you may use the 4% rule for your retirement savings, but then choose to use any gains from the $390k as fun money/discretionary spending (which means if your investment goes down, you just don't take any out, which is why the 4% rule exists because you'll need income even in down years).  For example, if I was set for retirement and my parents left me $3M upon their death...I might not necessarily use the 4% rule on that money even if I were using it on my retirement fund since that's extra money I don't need to fund retirement.

3. I'm not sure "generate" necessarily means "take out" to everyone. One of the reasons I'd take the lump sum, is because investing the $390k can generate more annual returns in general than the annuity...just because I'm generating more money doesn't mean I'm spending it...in fact I'd be reinvesting it until I retired in my own circumstances.

If you were just looking for a steady income, then the $25k makes more sense most likely.  I think most of us are not in retirement though (or if we are, we're already relatively set) so that we wouldn't be counting the $390k towards needed retirement income.

[resolution]

Jan 24, 2018 16:46:47 GMT -5 Lizard Queen said:

Jan 24, 2018 16:26:26 GMT -5 resolution said:

I would take the lump sum as well. I am under the impression that Michigan isn't in the best financial shape, and I vaguely recall reading about a state that wasn't paying out lottery stipends due to a budget crisis.

In her case, I hope that her lump sum lasts throughout the time that she is caring for her mother full time, so she is able to go back to work after it is spent. $390k really isn't that much money, especially if you plan to spend it instead of letting it grow.

That's not true about Michigan at all. They cut way back on revenue sharing to cities and school funding years ago, so the state has a healthy surplus now. The cities and schools are pinched, but the state is fine. Anyway, I think this is a national lottery game that wouldn't be subject to the state's whims, regardless.

It was Illinois I was remembering. www.chicagotribune.com/news/local/breaking/ct-lottery-delayed-payments-met-20170627-story.html

I am pessimistic about any individual state remaining solvent for the rest of my lifetime, although I am sure that some will come through in fine shape.

[Miss Tequila]

Jan 24, 2018 16:49:10 GMT -5 minnesotapaintlady said:

Jan 24, 2018 16:41:44 GMT -5 Miss Tequila said:

I agree. I could invest the $390k and make much more than $25k a year. But if she had that ability she wouldn't be on the verge of homelessness. My mom would piss away the $390k so even at 69 years of age I would recommend she take the $25k a year.

Everyone keeps talking about 390K, but I'm pretty sure this gets taxed the same as a bonus check at 39% and then your state tax rate on top of that.  I'm thinking the new house and new car will wipe out the remainder of what is left in most areas. 

Isn't the bonus rate only 25%?

I get your point but I'm still saying that a person that is so bad with money that they are nearly homeless is not a person that should be handed just under $300k. I have significantly less than $300k into my rentals and I make much more than $25k a year on them. That was my point with my statement about me taking the lump sum.

[Miss Tequila]

Jan 24, 2018 17:01:57 GMT -5 Rob Base 2.0 said:

Sew eye guest eye yam confused.....

Conventional wisdom says you should take $40K a year from $1M nest egg in order for it to last in retirement (4% rule).

 But some of you on here suggest investing the $390K so you can generate (from my interpretation meaning "take out") more than $25K a year.  What happened to the 4% rule?  

I have about $75k of my own money invested into rentals.  I net $40k a year on them (before taxes).  That is why I am saying I can generate a lot more than $25k a year if I were to take the lump-sum payment. 

[Deleted]

Jan 24, 2018 17:20:41 GMT -5 Miss Tequila said:

Jan 24, 2018 16:49:10 GMT -5 minnesotapaintlady said:

Everyone keeps talking about 390K, but I'm pretty sure this gets taxed the same as a bonus check at 39% and then your state tax rate on top of that.  I'm thinking the new house and new car will wipe out the remainder of what is left in most areas. 

Isn't the bonus rate only 25%?

Yeah, I was getting confused.  I saw that the last big lotto winner was taxed at 39% and was thinking that was bonus tax, but it's taxed as ordinary income, not bonus rate, so someone winning 390K would be taxed 35%...at least in 2017.  I don't know what the brackets are this year. 

[lynnerself]

"So someone winning 390K would be taxed 35%...at least in 2017."

Marginal rate. A little less for the overall rate.