WatchTake the money in installments or take the money in a lump sum? Most people jump for the lump some option, but is it really all that good of a deal?
Say the lottery prize is 1 million dollars. If you take the lump sum, they will only give you half the amount before taxes. So that $500,000, with a 40% tax rate, that leaves you with $300000. Now if you take the 1 million dollars over 20 years, assuming a 40% tax rate (although I do believe it's lower) would yield you $30,000 a year, or $600,000 over 20 years. Now most people firmly believe they are financial wizards and could get a higher rate of return on there money there by turning there 300k into much more than the 600k if they invest wisely over 20 years.
And they would be right, but the old hard fact it most people are morons when it comes to investing. They buy when the stock is the "IN" stock and sell when everyone is bailing out of the market. They do the exact oppose of how your suppose to invest, they invest on Greed and Fear. We will also over look the obvious fact that if you got 300k, your not going to deposit the entire amount and invest it. Your going to spend it, 200k of it at least I'd say, your lucky if your going to have 100k left to wisely invest. Despite what the advisers say I think your far better off taking the money in installment than in a lump some.
Lets look at this another way, lets say the prize is 10,000,000 dollars, that gives you a 3 million dollar lump sum payout after taxes, or 300k a year for installments. You go hog wild and blow 1 million and invest the other 2 million. I predict that chances are your not going to earn 6 million dollars on that 2 million dollars by investing, the who people are morons when investing rule is going to come into pay and you'd be lucky to have anything left of that 2 million after 20 years.
Another thing I would like to point out is, buying 2 lottery tickets doesn't double your changes of winning the lottery. Some people believe if the odds of winning are 1 million to 1 and you buy 2 lottery tickets, your odds are now 500,000 to 1 and 4 tickets would be 250,000 to 1. This is just delusional. If you buy 2 lottery tickets, you have two shots of winning the lottery at the odds of 1 million to 1. Even if you purchased 500,000 lottery tickets, your not guaranteed a 50% shot at the price money, you have 500,000 chances at 1 million to 1 at winning the lottery. The only way those 500,000 tickets would translate into a 50% chance of winning if they were purchased in a way to cover the 500,000 possible combination's in the tickets. Even someone that purchased 1,000,000 random tickets isn't guaranteed to win, unless all the possible combination's are covered. Chances are the random tickets would cover somewhere around 60 to 70% of the possible combination's, with several repeats.
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I need to correct your math.
If the odds of winning the lottery are 1 million to 1, then the odds of winning with 2 tickets are indeed one chance in 500,000.
I'd take the lump sum because I have no faith whatsoever in the value of the dollar.
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I would also take the lump sum, then do two chicks at once.
(obligatory Office Space movie reference).
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iwog says
So a million random tickets guarantees a win? I think not. I still say more tickets increases the number of shots you have of winning, but they do not decrease the odds at all.
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Who said anything about random tickets? I said TWO TICKETS! Who buys two tickets with the same numbers on them?
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Let's look into the numbers,
500,000 pre-tax present value vs. 50,000 pre-tax annuity over 20 years, that is a discount rate of about 9%. It takes ten years to receive 500K and still have 500K left over a period of 20 years. 9% is signicantly above inflation and about twice the rate AAA rated bonds.
500,000 pre-tax lump sum, the bulk of it is in the 33% fed and 9.8% state tax bracket, I have no chance to keep a lot of money away from uncle Sam and auntie Sally. with the 50,000 installments I have a chance to at least shelter them into the lower tax brackets and allow inflation indexing to work it's magic on years income are light and/or semi retired.
I'll take the installments thank you. Most likely in real life, the discount rates is around 4.5% (or a lump sum value of around 650K which makes the decision more agonzing). There are ways to work around inflation hedge other than taking the lump sum (in your example) which seems to be a poor choice.
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Let's see. If there were truly a one in a million chance of winning $1,000,000, then they are probably charging $2 per ticket. But in any case, IWOG is correct. Buy two tickets, and your chance of winning basically doubles, as long as you choose different numbers on the second ticket.
If you bought all the 1,000,000 possible combinations (we implied there were a million possible combinations), then you would be guaranteed to win, but you also would have spent $2,000,000. There also would be the possibility of sharing with another winner.
Still it's basically double the chance of winning if you buy 2 tickets.
IF you are choosing random numbers each time, instead of covering all of the combinations, then it is more complicated, and you are right, you would be nowhere near GUARANTEED to win if you bought 1,000,000 tickets. But if you buy two, its pretty easy to make sure you have two different numbers.
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many people take the lump sum and blow the whole thing. but people who take the payments usually screw themselves too. You get $500k a year, after taxes is $250k. You get $20k a month. Your mansion loan is $10,000 (you live in a reasonable area in my scenario), your cars & misc purchases are $5,000, your give away money is $5k, and you're broke. People crawl outta the woodwork just to be your friend.
But I'd take the money anyway. already got mine spent. :)
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Many of us could handle it,...winning that is. In my case, I like gambling, on occasion, and especially a good poker game, but I don't play the lotto. I had an aunt who said, "hey,...somebody has to win."
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iwog says
Duck you keep saying that...
meanwhile 1 Euro = $1.29
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A euro may only get you $1.29 these days, but the question has to be what the $1.29 buys.
There's been a significant amount of inflation in my daily expenses since I got here in 2000.
Basically the Club Card prices in Safeway are what the normal prices used to be, or worse even.
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Yes but the inflation you speak of has nothing to do with classic supply and demand.
The reality is there has been a serious deflation that is masked by manipulating market and low employment.
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SF ace says
Lottery winning are generally exempt from state taxes in most states, New York is an exception, you have to not only pay state taxes, but city taxes too if you if in New York City.
marcus says
While I can agree that you double your chances of winning by buying two tickets, you do not decrease your odds of winning. Just because you have two tickets with unique numbers, you can't divide 2 into 1,000,000 to get 1 in 500,000 odds.
As for buying all the possible combination's, you wouldn't just win the top prize, but all secondary prizes as well.
Take the Mega Million lottery for example, the odds of winning are 175 million to 1. So if you were to purchase every combination, regardless of what the top price was, you would win all of the 5 out of 6 number prizes, as matching 5 balls but not the power ball, at $250,000 each that would be 11.25 million dollars, and matching 4 numbers and the power ball, the prize of 10,000, would be 2.5 million dollars, Matching 4 out of 5 balls, but not the power ball or 3 out 5 balls and the power ball is $150 each, giving 4.3 million dollars, and the final 4 possible winning combination's, would yield 14.4 million dollars. The grand total is 33.5 million dollars, this money wouldn't have to be split among winners, these are set amounts regardless of how many winning tickets they have.
Now what kind of price would be worth this kind of investment? Well if they take 50% for taking a lump sum payment and another 40% off the top, would require a 540 million dollar top prize to break even on such a wreak-less investment. (assuming there were no other top prize winners)
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TechGromit says
Yep--pretty sure you can.
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tatupu70 says
I was told there'd be no math... I mean, I just buy a ticket every now & then, and hope I win.
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I think the financial advisers are correct. You forget to mention inflation.
After the first few years, the fixed amounts they agreed to pay you will, especially in the current economic climate, rapidly become worth substantially less in inflation adjusted dollars.
If I win the lottery, the first thing I would do is buy myself a nice castle somewhere. 20 years down the line, no matter what happens to the currency, if you sell the castle it will still be worth more than half of what I paid, even if I trash it. The cash however won't be.
So, even if you spend your money on things you enjoy (as long as you spend most of it on goods that have some long term value), it's pretty hard to do worse than the returns they offer you.
Think about it - if the lotto company can invest your money and guarantee you those returns, why can't you? Just hire the same investment guy the lotto company uses - duh! They are not in the business of taking risks, so if they promise you a particular return, it's because there is NO risk of them doing worse than that, which means the return is TERRIBLE.
Despite what you say above, I still think you CAN'T really do worse, and your logic above leaves out quite a few other aspects of this.
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zzyzzx says
Classic! +1.
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I don't know about mega and how it pays out, but i was reading about powerball... it pays p&i, so you receive more than your stated winnings at the end.
But in this case, when I win, I'm buying a new throw rug. :)
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Potatoes!
And of course, inviting ApocalypseFuck to train and outfit my minions.
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Vicente says
No elliemae to tend to your critters? I'm hurt... gonna stew by the cement pond and think of ways to get back at you.
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The first thing I would do is become a republican. jk
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First: Find a really mean, angry, lezbian, Demoncrat, lawyer. Hire her to protect me.
Second: Give away ALOT of money to faith based orgs, Boy Scouts, Wounded Warriors, build a few parks and play areas.
Third: I'd keep working at my job. I love my job and I am needed here, so I would keep doing it until a good replacement is found.
Fourth: I'd open a family business so my kids and their kids will always have a job. I'm thinking something in the way of family fun center or pizza place, or gym, not sure. My kids would not be rich, I would be rich. When I die, then my kids can be rich.
And then I'd continue to avoid death and taxes for as long as possible.
p.s. I'd buy ellie the rug store that carries the rug she wanted.
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Tech,
I would pay-off the mortgage for all of my family & wife's family members except mines. I would even pay-off your wife's car and your credit card debts. That should help you guys out quite a bit. How about that? :)
I'd use a good chunk of the proceed to invest in real estate and build an orphanage. I will use the yields from the real estate investment to fund the monthly expenses for the orphanage.
Well, it depends on how much I win. Can't make too much promises without knowing the actual amount I will get. :)
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iwog says
Yeah, you should take the lump sum.
I would have a REALLY nice airplane, hangar and run up plenty of instructor time. That's how you stay alive in aviation.
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I changed my mind.
I'd open a bar like this one:
I expect Patnet readers would feel at home.
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I don't play lotto much. Once I did and scanned the ticket at a 7-11. "Congratulations you are a winner" I was so happy.
I won $1.
I had no idea you could win one lousy dollar. What a let down.
If I won lotto I would really cherry out my Toyota let me tell you.
Lump sum of course.
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No math wiz here but buying 2 tickets does not decrease the odds of losing by half. The odds of winning tonight are approximately 176 Million:1 buy two tickets and the odds of winning are 176M:2 and not 88M:1.
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Buster says
It's 88M:1
Buying up 50% of the available number combinations and your odds are 2:1
Buy up 100% of the available number combinations and your odds are 100%.
Buy up 25% of the available tickets and your odds are exactly 4:1
You're thinking of statistical draws where each draw is independent. The lottery isn't like that because you're not going to repeat any number combinations.
Picture a roulette wheel with 36 spots. Now pick two adjacent numbers. You can think of the wheel divided into 18 2-number sets making your true odds 1:18
Now pick 3 numbers. You can think of the wheel divided into 12 3-number sets making your true odds 1:12
And so on. That's the lottery.
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iwog says
Correction:
Buying up 50% of the available number combinations and your odds are 1:1 (even odds). Buy up 100% of the available number combinations and your odds are 100%. Buy up 25% of the available tickets and your odds are exactly 3:1
25% chance is the same as 3 to 1 odds. ( one out of four times you win, and three times out of 4 you lose).
But you aare correct. 2/176M chance is the same as a 1/88M chance.
But technically, Buster's right too.
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Okay you're right. I get confused. I should have said 1/2 and 1/4 and 1/1
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then, wouldn't it be wise to invest in 176M individual unique tickets of every combination when the prize is 600M?
or, are there more combinations than that?
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I didn't check to see if 1/176M is correct, but yeah, that's what gets everyone's attention is when the pot gets so high that the tickets actually have an "expected value" greater than their cost. Presumably that's why Iwog did the pool.
Winning didn't get any more likely, but the prize went up enough to make it theoretically a good deal.
In answer to your question Bap yes, except for the fact that
A) it would cost a significant amount to do it, if it's even possible.
B) With the prize that high there is a significant chance of even 4 or more people winning.
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By the way,....d'oh !
marcus says
Wrong Marcus.
Not sure what I was thinking.
2/176,000,002 is the same as 1/88,000,001 buster was wrong.
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I see where multiple winners would cause a reduction to below the 176M buy in.
So, in my simple mind it makes sense for the lotto winning to cap each winner ticket at 176M, with multiple drawn tickets based on possible purse.
What I mean is to draw a single set of numbers for any purse up to 176M. Draw a second set of numbers for a second winning set for any purse bewteen 176 and 352M. Yes, the first series on numbers would win the full amount, the second series is for the residual up to an equal 176M before triggering a third series on numbers to be drawn for any purse between 352M and 528M ... any chance you guys follow that idea?? The point being it keeps the possible unique entries to a match to the purse, and will trigger MUCH more participation due to increased chances to win at every draw over 176M.