Comments on: How You Know Just How Bad the Economy’s Gotten

By: Chad @ Sentient Money

Chad @ Sentient Money — Tue, 14 Oct 2008 13:49:18 +0000

@ Rick
The problem with putting a lottery lump sum into T-bills right now is you would essentially be earning 0%. Everyone has rushed into T-bills for safety and driven up the price enough to cancel out the 3-4% interest.

The lump sum is better considering all factors (returns, taxes, etc.) if you have average money management skills. However, as the recent financial debacle has shown, the majority of people can’t even spell money management. An ARM loan…really? So, they are probably better off taking the annuity, though they will still need to invest some of it if they are young enuogh.

By: thepi

thepi — Mon, 13 Oct 2008 18:09:04 +0000

Of course lottery winners are terrible with money. They PLAY THE LOTTERY.

By: Nentuaby

Nentuaby — Sat, 11 Oct 2008 02:49:47 +0000

BradJ: But that logic only works if it is growing at the interest rate of a bond while in the Lottery Commission's hands. Some lotteries may work that way, maybe the one you're most familiar with, but most I know of simply pay out the initial amount over time. It's like money under a mattress; negative real growth.

By: MWT

MWT — Fri, 10 Oct 2008 21:48:18 +0000

Hmmm….

My living expenses are only about $20k per year, so to me, anything beyond that would just be gravy. I’m not sure I’d necessarily care how much I lost in taxes – as long as I could continue to live well and donate to all the charities I wanted.

I wonder how much I’d have to win to generate $20k in yearly interest…

By: Brad J

Brad J — Fri, 10 Oct 2008 19:21:54 +0000

While I haven’t played with the numbers for a while, I’m amused by all the insistence that the annuity is an awful, awful decision.

Would you rather let the money grow tax-free for up to 20-30 years (depending on lottery), or get it all taxed up-front, and then have any growth taxed as well?

Yes, you can beat the returns on bonds. But can you do it consistently? After tax? When you’ve lost between a third and half of the seed cash to taxes before you start?

By: John Scalzi

John Scalzi — Fri, 10 Oct 2008 19:11:47 +0000

R.W. Ridley:

Speaking as someone who once administered a contest with a million dollar payout, I can say the annuity is generated by an already-existing sum; i.e., the money is there and not dependent on the liquidity of the state.

By: Ellen Asher

Ellen Asher — Fri, 10 Oct 2008 18:57:28 +0000

I don’t play the lottery, and I really have no idea how these things are structured, but I’d assume that, with a jackpot of $42 mil, the annuity would be at least a million a year for, what, twenty years? Honest, kids, $1,000,000 a year is *plenty* to live on, with lots left over to invest, give away, etc. And if you manage to screw up big time through lack of experience handling large sums — there’s another million coming in next year, aka a safety net.

R. W. Ridley @14 If things get bad enough that the State of Michigan goes bankrupt, I doubt that any of the lump sum investments would still be viable.

By: rick

rick — Fri, 10 Oct 2008 18:22:49 +0000

The fact that they based their decision on the current economy is evidence that they made the right choice – that’s short term, emotionally based decision making.

Personally, if it was a large lottery (giving me 20m or more as a lump sum), I’d take the lump sum, break off enough into investments that, if it’s a T-Bill return I can live on the return, and then pause. I may well splurge some in the first year – that’s part of the attraction of a lottery after all. But I’d only do it with money outside of the lump sum and I wouldn’t blow it all. In fact, after an initial splurge (buying a nice penthouse condo in downtown Seattle perhaps, traveling for a year or so), I’d very likely setup a foundation and run that. After all, if I’m set for life… and I’ve got millions… why not use the cash I don’t need to help others?

By: Irene Delse

Irene Delse — Fri, 10 Oct 2008 18:02:43 +0000

“historically, lottery winners are terrible money managers”

Heh. Buying lottery tickets is a terrible choice of investments.

By: Max Kaehn

Max Kaehn — Fri, 10 Oct 2008 17:56:44 +0000

I’d take the lump sum and invest it in something that had a prayer of keeping ahead of inflation. What’s the purchasing power of that annuity going to be like in ten years?