Mega Millions winner Williams has the choice to receive a lump sum payout of $168 million (about $117 million after taxes), or an annuity payment of a pre-tax $11 million a year, paid out in 26 annual increments.
A mother of three and grandmother of 8, Williams has not yet announced which she'll choose. But the lump-sum seems likely.
"Almost everyone takes the up-front payment," says the MSLA's Mahoney.
It's the same with Mega Millions. "The vast majority go for the cash," White said.
Mahoney argued that the annuity is a better choice, at least in the hypothetical.
"If you were to win $100 million, the cash option might be about $59 million," he estimates. "Taxes get taken out right away, so you start with just over $40 million. There's no way you're going to get a high enough annual return every year to build that up to $100 million over the life of the annuity."
For his part, though, White understands why someone would choose the lump sum payment.
"We never tell people what to do," he says, noting that his business is doling out money, not financial advice. "But most winners would say it's a no-brainer to go for the cash."
http://money.cnn.com/2004/07/09/pf/saving/lottery_windfall/
Here's what I don't get, now that I'm looking around. The guy clearly states that he doesn't think you can get a interest rate on $40 million over 26 years to get back up to $100 million. But if you assume a 5% interest rate over 26 years with compounding, you'll get $142,226,907.52. Now that's assuming you don't take any money out and dedicate it all to investing it. But I would assume you would take money out of the annuity, if you end up taking from your investments whether you go with the annuity or lump sum. I just want to illustrate the potential without making assumptions of how much of costs.
The chick they described could have took an annuity of $11 million, pre-tax over 26 years to add up to $294 million or took the lump sum of $117 million, after taxes.
Future value with just the principal, 5% interest, annual compounding and no additions:
A FUCKING WHOPPING $416,013,704.49.
Someone want to try and explain what I'm doing wrong? Besided leaving out that the annuity at $11 million is pretax so you'll assume Uncle Sam is gonna eat into that.
Even if Uncle Sam takes out 50% when you die, after taking the lump sum, it still overshadows anything the annuity would have done, I'm guessing.
Foolishness is taking the annuity. But then again, the people from the lottery would say take the annuity, cuz they only have to pay you so much and they can keep the rest.
Oh well, it's all right here:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm