Does the increase in the return on bonds increase the payout on annuity'sPrev Topic Next Topic

New Topic New Poll

DELotteryPlyr

Maryland
United States
Member #162,427
January 2, 2015
3,206 Posts
Offline

Dec 19, 2016, 5:48 am

I watch way too much business news - with the rise in the bond rate (rate of return) do the annuity rates go up? I thought they were based on the bond rate? Hoping someone smarter than me can help, thanks.
Sunglasses

Belgium
Member #173,925
March 26, 2016
1,396 Posts
Offline

Dec 19, 2016, 9:10 am

Ask 007, he must know it!
Tialuvslotto

Texas
United States
Member #150,790
December 31, 2013
824 Posts
Offline

Dec 19, 2016, 9:34 am

Annuity rates are based on the interest rate in effect at the time the annuity is purchased.

But why on earth would you take an annuity payment over a lump sum?

"There is no such thing as luck; only adequate or inadequate preparation to cope with a statistical universe."

~Robert A. Heinlein
Raven62

25

New Jersey
United States
Member #17,842
June 28, 2005
180,983 Posts
Offline

Dec 19, 2016, 10:31 am

It's all about the Time Value of Money!

A mind once stretched by a new idea never returns to its original dimensions!

Catch-22: A dilemma or difficult circumstance from which there is no escape because of mutually conflicting or dependent conditions.

Corruptissima re publica plurimae leges: When the republic is at its most corrupt the laws are most numerous.

The best way to learn is to never stop being an Experiential Student!
rcbbuckeye

100

Texas
United States
Member #55,887
October 23, 2007
17,761 Posts
Offline

Dec 19, 2016, 10:42 am

Quote: Originally posted by Tialuvslotto on Dec 19, 2016
Annuity rates are based on the interest rate in effect at the time the annuity is purchased.

But why on earth would you take an annuity payment over a lump sum?

At my age there is no way I take an annuity. I know my kids/wife can inherit an annuity, but I simply don't trust that the money will always be there for the life of the annuity. Who knows, the government might decide to do funny stuff with annuities. Increase taxes...etc.

CAN'T WIN IF YOU'RE NOT IN

A DOLLAR AND A DREAM (OR $2)
Raven62

25

New Jersey
United States
Member #17,842
June 28, 2005
180,983 Posts
Offline

Dec 19, 2016, 11:15 am

If the Economy Collapses the Money you have will become Worthless!

https://www.thebalance.com/u-s-economy-collapse-what-will-happen-how-to-prepare-3305690

https://www.shtfplan.com/headline-news/billionaire-warns-of-total-collapse-end-game-scenario-no-way-out-your-money-will-be-worthless_03012015

A mind once stretched by a new idea never returns to its original dimensions!

Catch-22: A dilemma or difficult circumstance from which there is no escape because of mutually conflicting or dependent conditions.

Corruptissima re publica plurimae leges: When the republic is at its most corrupt the laws are most numerous.

The best way to learn is to never stop being an Experiential Student!
Sunglasses

Belgium
Member #173,925
March 26, 2016
1,396 Posts
Offline

Dec 19, 2016, 11:56 am

Quote: Originally posted by Raven62 on Dec 19, 2016
If the Economy Collapses the Money you have will become Worthless!

https://www.thebalance.com/u-s-economy-collapse-what-will-happen-how-to-prepare-3305690

https://www.shtfplan.com/headline-news/billionaire-warns-of-total-collapse-end-game-scenario-no-way-out-your-money-will-be-worthless_03012015

You could use inflation to pay of credit. I think that your friend Adolf did it that way. :)
Raven62

25

New Jersey
United States
Member #17,842
June 28, 2005
180,983 Posts
Offline

Dec 19, 2016, 1:20 pm

Quote: Originally posted by Sunglasses on Dec 19, 2016
You could use inflation to pay of credit. I think that your friend Adolf did it that way. :)

If you were alive during the World War II German occupation of Belgium maybe you'd understand how insulting you are!

A mind once stretched by a new idea never returns to its original dimensions!

Catch-22: A dilemma or difficult circumstance from which there is no escape because of mutually conflicting or dependent conditions.

Corruptissima re publica plurimae leges: When the republic is at its most corrupt the laws are most numerous.

The best way to learn is to never stop being an Experiential Student!
KY Floyd

NY
United States
Member #23,834
October 16, 2005
4,772 Posts
Offline

Dec 19, 2016, 4:00 pm

The annuity value is always based on investing the cash sum, so it always reflects the interest rates that are earned by investing the cash.

If you've been paying attention lately you should see that the cash value is a significantly smaller percentage of the annuity now than it was a few months back. The most recent PB jackpot had a cash payout of $254.6 million, which is just 60.5% of the $420.9 million annuity value, whereas the $165.6 million cash value of the previous PB jackpot ( 9/17/16) was 67.1% of the $246.8 million annuity value.
DELotteryPlyr

Maryland
United States
Member #162,427
January 2, 2015
3,206 Posts
Offline

Dec 19, 2016, 4:26 pm

Quote: Originally posted by KY Floyd on Dec 19, 2016
The annuity value is always based on investing the cash sum, so it always reflects the interest rates that are earned by investing the cash.

If you've been paying attention lately you should see that the cash value is a significantly smaller percentage of the annuity now than it was a few months back. The most recent PB jackpot had a cash payout of $254.6 million, which is just 60.5% of the $420.9 million annuity value, whereas the $165.6 million cash value of the previous PB jackpot ( 9/17/16) was 67.1% of the $246.8 million annuity value.

Yea, it 'clicked' when I was at work - the CASH VALUE would go down since rates are better.

Thanks for the examples.

Nice that we have people on this site that know about all facets of the lottery.
KY Floyd

NY
United States
Member #23,834
October 16, 2005
4,772 Posts
Offline

Dec 21, 2016, 1:33 am

"the CASH VALUE would go down"

It goes down relative to the advertised annuity, but since the annuity is determined by how much cash can be invested it's really that the annuity value is going up.

The exception would be for an advertised jackpot that's not fully funded by sales, which usually means those that are less than $100 to $110 million (advertised annuity, of course). If somebody wins Wednesday's jackpot that's advertised as $40 million they'll get $23.7 assuming they take the cash. If they had won the $40 million jackpot back in early August they'd have gotten a hair over $28 million.
savagegoose

adelaide sa
Australia
Member #37,135
April 11, 2006
3,341 Posts
Offline

Dec 21, 2016, 6:04 am

oh ok i used to work out my share of the prize by dividing the annuity by 5.2; 2.6 for the total cash amount, but that has changed now. closer to divide by 6 or 3. smaller cash amounts , higher advertised jackpots. got it.

" Still swinging, still missing "
2014 = -1016; 2015= -1409; 2016 = -1171; 2017 = -1257 ; 2018 = - 1380 = TOT = - 6233

keno historic = -2291 ; 2015= -603; 2016= -424; 2017 =-427; 2018= -223 TOT = -3968

:
Redd55

United States
Member #164,717
March 12, 2015
1,300 Posts
Offline

Dec 22, 2016, 9:54 am

Powerball Jackpot for Wed, Dec 21, 2016
$40,000,000
$23,700,000

Powerball Jackpot for Wed, Sep 21, 2016
$40,000,000
$26,800,000

Powerball Jackpot for Wed, Aug 3, 2016
$40,000,000
$28,100,000

Powerball Jackpot for Wed, May 11, 2016
$40,000,000
$26,500,000

Powerball Jackpot for Sat, Mar 5, 2016
$40,000,000
$26,300,000

---------------------

Those are some big swings. We're talking $4.4 million from August to December.
Kingofearth

Israel
Member #174,649
May 5, 2016
1,100 Posts
Offline

Dec 22, 2016, 2:44 pm

Quote: Originally posted by Tialuvslotto on Dec 19, 2016
Annuity rates are based on the interest rate in effect at the time the annuity is purchased.

But why on earth would you take an annuity payment over a lump sum?

If the lump sum would be extremely tiny to the point that you can't live extravagantly off of, why not just get a nice check instead? I expect to live way past any annuity timeline, so why not get all that extra cash?
KY Floyd

NY
United States
Member #23,834
October 16, 2005
4,772 Posts
Offline

Dec 23, 2016, 2:39 pm

First, as long as PB has a minimum jackpot the lump sum is never going to be "extremely tiny" except in the very unlikely event of being split several ways. Even if sales drop to a small fraction of what they are now the cash value of the minimum jackpot will still be the amount necessary to fund the annuity. If the cash value was only 40% of the annuity value the lump sum would still be $16 million, and the after tax net would be $8 million or more. Today a really safe investment may only produce an annual income of 200k or so, but rates would be a good bit higher if the cash annuity ratio swings that far, so the return on principal would be a good bit higher.

Second, it's not extra cash. It's interest that's earned by the principal, and principal can earn interest whether it's invested by the state or by the winner. If that winner spends all of the annual payment and outlives the annuity period they won't have that income anymore. If they invest some of the annual payment they're going to have to invest differently than the state does. The state has to invest in a safe investment in order to guarantee the annual payments, and that means a lower rate of return than might be possible, but the state gets to invest the full pre-tax amount. If the state invests $100 at 3% it earns $3, and that $3 is untaxed and mostly remains invested. With current tax rates the best case scenario for a lump sum would be investing a bit over $60, and earning $3 (of taxable income) would require an interest rate of 5%. You'd need to earn 6.666% to net $3 after taxes if you paid 25% in income taxes. That means that for a given level of investment safety the state gets a rate of return that's effectively twice as high, or even better if the winner pays a higher percentage in taxes.

None of that is to say that taking the annuity is automatically a bad deal, but talking it because you think it pays more money misses the full picture. The best reason to take the annuity if it does pay substantially more than the lump sum would be that you're forced to lock in the higher interest rate in a safe return. That may also reduce the chances of losing the money by blowing through the lump sum too quickly, since annual payments can encourage you to live on a reasonable budget. Taking the annuity today would men locking in an interest rate of about 3%, which is better than a really safe investment has gotten for most of the last several years, but it's significantly lower than most of the last 30 years.