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.
