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    Nice Problem to Have

    By admin | June 23, 2008

    I am a day dreamer.  I often relate to JD from Scrubs on a regular basis and find myself drifting off with my thoughts.  Sometimes I end up thinking through math problems oddly enough.

    One of the scenarios that I have thought of was if I won the lottery and won, let’s say 50 million dollars, should I take all that money and take the lump sum or should I take payments over the course of a certain amount of years?

    Now I know this is a nice problem to have (unless you are Hurley from LOST).  But let me show you what decision I would make.

    In order to answer, we need to put a few assumptions into play. Chances are, the lottery will want to spread out annuity payments across 25 years. Meaning, they would pay out 2 million a year. Or they will offer a settlement for usually about 60% the total.

    Lump Sum

    So, if I opted to get the lump sum now the approximate settlement would be $30,000,000 minus taxes (35% federal tax bracket = $10,500,000).

    So the total present value is $19,500,000.

    Yearly Payments

    This would be $2,000,000 minus taxes (35% federal tax bracket = $700,000).

    Net of $1,300,000 per year.

    However, there is a concept called the time value of money that we all learn in our entry level economics class. Basically, $1 now is more valuable than $1 a year from now, or 5 years from now, so you have to take that into play using financial calculations.

    I ran the numbers in my financial calculator and $1,300,000 per year for 25 years with the assumption of 4% inflation has the PRESENT value of $20,308,703.93.

    So according to our assumptions:

    Lump Sum Present Value = $19,500,000

    Yearly Payment Present Value = $20,300,000

    Both are similar which is what I expected to find when I ran the numbers, but getting the annual payment actually looks like you might come out a little ahead. The results will change depending on what the assumptions are, so make sure when you win your millions to run the numbers again just to be sure.

    Topics: Planning |

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