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ETpro's avatar

How can you invest the one time payout to match the yield of the lottery's annual annuity? (See details)

Asked by ETpro (34217 points ) March 29th, 2011

If you win one of the big lotteries such as the Mega-Millions (recently hit $319 million) or Powerball (currently at $153 million) you have a choice of taking a one time payout at about 50% of the stated jackpot, or collecting the full amount over a series of years. For instance, if you won the $153 million Powerball jackpot and opted for the one time payout, you would receive $77.4 million before taxes. If you went for the annuity, you would get 30 annual payments of $5.1 million each before taxes. The Mega Millions works in a similar fashion, but has a 26 year annuity, so annual payout for the same prize size are slightly higher with it, and the one time payout is less than 50%. In each case, the actual jackpot is what you get in a one-time payout. If you elect the annuity, the lottery invests the real jackpot money in investment instruments that yield enough to provide the larger payout over time even though annual withdrawals are being made from the principal invested.

Say you win a big jackpot like the current Powerball $153 million and you aren’t certain that the lottery’s investment holders will remain solvent for 30 years and actually pay out your full winnings. Therefore, you elect to cut the winnings in half and take it in a lump sum. How could you invest the bulk of that lump sum so that it would be reasonably safe and would end up paying you as much, or nearly as much, as the lottery had promised in the sanitized prize?

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6 Answers

tedd's avatar

Assuming the lump sum is 77.4 million dollars, and you want to eventually get to 153 million (within the 30 years it would’ve taken to get the whole amount from them).... just invest it.

If you find a CD paying 5% interest, you would turn almost 4 million dollars a year out (if you invested your entire 77.4). You could spread it out over multiple CD’s to lower your chances of losing money should a band go under. You could read up a bit on the stock market and invest there and probably rather quickly make up that difference.

ETpro's avatar

Great answer, @tedd. That way you’d earn plenty to eke out a living each year and still have your original $77.4 million invested and earning for you at the end of the 30 years. In that case, taking the one-time payout is a no-brainer.

gasman's avatar

Using a (lousy) internet financial calculator, it looks like 77.4 million requires an average interest rate of just 2.3%, compounded annually, to yield 153 M in 30 years.

I don’t know much about finance. Is 2.3% considered high in today’s recession-shocked economy?

ETpro's avatar

@gasman Thanks. But you’d need quite a bit more than that to be able to make annual withdrawals instead of allowing the interest to compound. I couldn’t find an online calculator that figured that for me.

tedd's avatar

@gasman In a savings account that would be difficult to get. Many CD’s are in that range. For sure you could find stocks that would produce that rate.

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