Experts advise to take cash option

May 20, 2004, 7:19 am (19 comments)

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Finance 101 for lottery winners: Take the cash, advisers say. Annuities could be a bad bet.

Say you win $110 million in the Pennsylvania Powerball drawing, as Steve and Kristine White did on May 8. Is it best to take the money in a lump sum or in an annuity over time?

Some experts think the answer is clear: Go for the big bucks. Now.

That could explain why the Whites are electing to take a check instead of a guaranteed annual payment of about $7 million, and why the state's three previous Powerball winners have all taken one-shot infusions over predictable payouts.

"For most people, not just the Whites, the lump sum would probably be a better decision," said Andrew R. Wolf, a lawyer in New Brunswick, N.J., who is part of the team advising the couple.

The explanation has to do partly with interest rates, which have rebounded from historic lows and are expected by many economists to continue to rise in the next year. Lock into an annuity now and you will get the same payment for the next three decades. But waiting could be lucrative. Just a one point increase in interest rates could jack up annuity payments by 15 percent or more, said Tim Flatley, president of Sterling Investment Advisors in Berwyn, which oversees $300 million in individual and corporate investments.

Flatley acknowledges that the lucky ticket holders will see their big winnings immediately depressed by taxes - the state withholds 25 percent for the feds, and millions more will probably be due. But a properly managed portfolio should generate 8 percent to 10 percent a year over time - or about double an annuity, Flatley said.

One reason to take an annuity, Flatley added, is to curb the urge to spend it all at once on big-ticket items like a Caribbean island.

"I'm sure they have more friends than they ever knew," Flatley said. "Their hardest decision right now will be whom to trust."

Pioneer Press

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CASH Only

Duh...

tg636

I'm still not persuaded.  If you take the lump sum, you start your investing minus 30% in fed/state taxes, minus whatever cash you want to spend or have on hand to live the good life, say 5%...and minus investment fees, say 1%.  So you have to invest it in such a way to make 36% interest just to equal an annuity payment. Nevermind making more than the annuity, and never mind living the good life which to me does not involve incessent thinking about investments or money.  Since the people giving this advice are people who make money investing lump sums, not annuities, I find their advice suspect.  There are good reasons for taking the lump sum - fear of future inflation making your future checks worth less and less is a good one - but the expectation that you are going to make more than the annuity over 26 years shouldn't be one of them. 

>Lock into an annuity now and you will get the same payment for the next three decades. But waiting could be lucrative.

Waiting? To hit the jackpot next year? Yes, I may be locked into it, but I am locked into getting the amount of the jackpot I won, so what have I lost? This seems to be advice for people thinking of starting their own annuities, not lottery winners.

keystonechas
Quote: Originally posted by CASH Only on May 20, 2004


Duh...



I smell a setup. CASH Only wrote this article did'nt he?

LOL, Chas

DoctorEw220's avatarDoctorEw220

i'm still going to take the annuity.

CASH Only

Dr: EW:

That explains why you didn't win the recent $213 million Powerball.

smd173
Quote: Originally posted by tg636 on May 20, 2004



I'm still not persuaded.  I may be locked into it, but I am locked into getting the amount of the jackpot I won, so what have I lost?






 

Why not take the cash and buy your own annuity? Then YOU control it, not the state.

st.germain's avatarst.germain

Take the cash option. History has shown that businesses fail as well as countries too. Who is not to say that legislators change the laws on lotteries affecting whatever money is left...and or affect the way future payments are handled.

DoctorEw220's avatarDoctorEw220

CASH Only:  Alright.  It was nice that you expressed your preference for the cash option, but I think you have taken it a little too far.  WE KNOW YOU PLAN ON TAKING THE CASH OPTION!!! It's nice that you have formed your own opinion, but it seems as if you are trying to push it on everyone else, and that is Communist.

rabbitfoot's avatarrabbitfoot

With an amount of 5-million dollars or less, I would take a lump sum payment and keep it all in CDARS.  That way I could reinvest right along with inflation.

Rabbitfoot

st.germain's avatarst.germain

All right doctor,  First of all this society is free country where we can express opinions....it is called freedom of speech...second,... I am a former member of the u.s.marine corps who volunteered for two tours in vietnam in a combat capacity whereas you witness that of soldiers who are participating in the present day age of war on terroism...I am a american....you sir, are a fool.

DoctorEw220's avatarDoctorEw220

that's what i'm trying to say.  we all can express our opinions, but when we take it too far, we take it too far.

weshar75's avatarweshar75

I think it is funny that the expert in this news article stands to benefit from the lottery winners money.  I guess I would tell them to take the cash too if I standed to gain something from it too.  When I win I will choose whatever option I feel like because that is what a winning jackpot ticket gives you.  The freedom to choose whatever you want!

keystonechas
Quote: O
keystonechas
Quote: Originally posted by DoctorEw220 on May 20, 2004


that's what i'm trying to say.  we all can express our opinions, but when we take it too far, we take it too far.



CASH Only does rant on the cash/annunity and hot lotto debate a bit at times. That's his right. It's also my right to rib him about it.

Chas 

bowldog

We do understand that we will pay taxes on lump sum and on the annuity after before your yearly payout don't we? I say take the lump sum and learn how to manage your investments, so when you pay someone else to do it you understand what is going on with your account(s).(less chance of getting ripped of) I'm not saying get a college degree, but you can get  someone to teach more than the basics in a way that you totally understand(you've got the money and the time). Take the money and run I say.

rdarmand

Annuities are a bad investment.

The estimated Powerball jackpot is currently $33M (29-yr payout), or $16.7M (lump-sum). Historically, common stocks average between 10% and 11% annually -- but let's assume they are depressed for 30 years and only average 8%. Let's further assume that the winner decides to live on $30,000 per month, indexed for inflation at 3.49% -- thus pulling $360,000 or more per year out of the system.

At the end of 29 years, the winner will have more than $67M -- more than double the amount of his lottery win -- and will have spent about $10.7M. In addition, he will have had control of his own money.

Annuities make sense only for people who don't know the value of a dollar.

LottoBuddy's avatarLottoBuddy

The cash option is much better for most people.  The value of the annuity is based on the interest rate on long-term bonds, so if your financial advisors invest the cash properly in a diversified portfolio that includes stocks, you can earn much more.  One of the few instances where the annuity option may be better is if the winner is stupid, undisciplined and refuses to follow good advice; such a person may blow his millions quickly while an annuity will limit his losses for each year.

four4me

Take the cash and if your worried you'll spend it all do what the lottery does buy yourself a bond or bonds with whatever amounts you can afford when it matures. Take the interest throw yourself a party. Then buy some more bonds.

CASH Only

I'll second that.

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