Mr Schwartz:

If somebody wins $1 mil on a scratch ticket in Massachusetts, is it wise to take the offered lump sum of $650K or the annuity of 50K for life with guaranteed minimum of 20 installments? Figuring after taxes, lump sum would be maybe $325K in your pocket total, and with forward-looking concerns about the high likelihood of both increasing capital gains taxes and rising ordinary income taxes in the future. The ticket holder is in early 40's yo and interested in trying to grow the lottery win with investing and clearly not interested in splurging on silly stuff; privacy is important to them. $325K is not that much in the bigger picture I suppose. But believes they could grow it nicely over time

If takes the annuity route, hopefully person can outlive the min 20 payments and continue the annuity for life. I realize of course that everybody's own situation is different. However, would like to know your take on such things? Thanks in advance.

jpcp in mass

Zip Code: 01905

Congratulations for winning the lottery (or knowing someone who won the lottery), and thanks for submitting such an intesting question. I had to reach back into my memories from Finance 101 at college for this one.

The issue at hand is the Time Value of Money. Basically, a dollar today is more valuable than a dollar tomorrow.

How much more valuable? In your case, the Mass Lottery is giving you a choice of receiving either $650k today, or receive a minimum of 20 payments of $50k each. I worked through the math, and for these two payouts to be equivalent, I calculated the interest you'd need to earn over time would be 4.5%.

Assuming my calculation is correct, and ignoring the impact of income taxes, here's what I would do if I had this choice to make:

1. If I felt I could earn more than 4.5% per year without taking on significantly more risk, I'd go with the $650k lump sum payout.

2. If I felt tax rates would be rising in the future, and I'd owe significantly more taxes on my lottery winnings in the future, I'd go with the lump sum.

3. If I felt good about my chances for living for more than 20 years, I'd go with the 20 year payout.

4. If my goal was to just save 100% of the money, I would go with the lump sum, while if my goal was to spend my winnings over time, I think I would go with the 20 year payout.

Please discuss this matter with a variety of people, and then make your decision based on all the information you had acquired. The info I gave here is just one man's opinion.

Zip Code: 01801

thank you very much for your reply

joe

Zip Code: 01905

Please let us know whether this person takes the lump sum or the payment stream, and what factors led to the final decision.

Thanks.

Zip Code: 01801

Decided to take it as a lump sum. Easy to second guess the thought process either way. I liked that a dollar today is worth more than a dollar tomorrow. Thanks again for the assist.

jpcp

Zip Code: 01905