In today’s Office Hours, Eric answers Mark’s question: “if you won the lottery and had the option of $30 million upfront or a million dollars a year for 30 years, which is actually the better option?”
Unfortunately this is not a circumstance many of us will see ourselves in, but let’s talk about it anyway. What are the realities of winning the lottery?
Have a question? Post it in the comments, tweet it to us at @BrotmanPlanning, or post it on our Facebook and it may be used in a future episode of Office Hours!
[00:00:00] Eric Brotman: This is Eric Brotman, the host of Don’t Retire… Graduate!: The podcast that teaches you how to advance into retirement rather than retreating. Welcome to office hours where we answer listeners’ questions about personal finance, retirement readiness, and more. We received a question from Mark who asked, “if you won the lottery and had the option of $30 million upfront or a million dollars a year for 30 years, which is actually the better option?”
And Mark, you asked a great question that people who win the lottery are confronted with, and the truth is most of the time, it wouldn’t be $30 million upfront or a million a year for 30 years. It would be some reduced amount upfront or a million a year for 30 years because of the time value of money.
So, if you had the choice of 30 million today or 30 million over 30 years, you would always take the 30 million today. And the reason you would always do that is that the value of a dollar, just because of inflation will be lower in two years and four years in six years and a whole lot lower in 29 years when you got that last check.
So if it was 30 million today or a million for 30 years, you would definitely take the 30 million upfront. But let’s say it was 20 million upfront or a million a year for 30 years. Now you’re in a different spot. Now you have to actually do a calculation and what you’re really solving for is called the net present value of that income stream.
And that you can find this online, you can find calculators and your in your software and so forth, but really what you’re trying to do is based on an inflation rate, you’re trying to figure out which of these is more valuable: 20 million today, or a million a year for 30 years because nominally, yes, that’s $30 million. It sounds like more. But the way, the value of a dollar erodes, I don’t know how old a guy you are Mark, but your grandparents probably paid for their house what you’re going to pay for your next car. And so, as a result, we have to look at dollars very differently if they’re in 2022 or 2051, for example. So when you calculate this, you’re calculating the present value or the net present value of a, of a stream of payments.
And all of this is going to be based on assumptions. If inflation is very low, the stream of payments is going to look great and if inflation’s high, then the lump sum is going to look great and you don’t always know what it’s going to be. So I think you have to use a reasonable assumption. Well, for the last 20 years, that reasonable assumption was somewhere around 2.4%, which is no big deal.
But right now you know, as, as I record this in the spring of 22, inflation is currently north of 8%, which means under no circumstances would you want to take a million a year if it’s going to erode that quickly money would be cut in half every a dollar would be cut in half every nine years if it was, if it stayed at 8% inflation, so you would never want to do that.
So the short answer is you got to do some math. You may wanna use your accountant or your financial advisor, or at least an online resource to figure this out. I feel compelled since you asked about the lottery to also talk about the lottery in a different way, which isn’t just how much money are we talking about, but also what actually happens to lottery winners.
First it’s important to know that because lottery winnings are taxable. And because this pushes you into the ultimately highest tax bracket you could ever be in close to half of it goes to the government. Anyway. So by the time you have that half remaining, that’s actually net. Now you have to figure out what to do with it.
And unfortunately, winning the lottery, particularly a big number like you described winning the lottery does not, in most cases create more happiness for people. In fact, it can create a very depressing situation. And I know that sounds counterintuitive. But it brings into question people’s relationships with you.
If you’re suddenly worth $30 million and your friends are struggling because they need four tires or they need a washer and dryer, or your family’s having troubles or whatever, there will be people with their handout in a very different way. And while you’re going to want to help presuming you’re a good human and a good steward and a good, a good member of society, you’re going to want to help in various ways.
But it does mean that you run the risk of having sort of that entourage cling on type of situation where you don’t know if people are spending time with you because you’re picking up the bar tab where they’re spending time with you because they genuinely enjoy you and care about you. So it creates some real problems.
You’ll notice that a lot of lottery winners decide to stay anonymous. And that’s why. They may not want people to know that they’ve come into sudden wealth. Last thing I’ll say about the lottery mark is that that for people who do win and of course winning is an infinitesimal shot. I mean, you’re more likely to be hit by lightning twice in the same day than you are to win the lottery in most cases but assuming you’re that one who wins, most people don’t have any way to deal with. Sudden wealth. And so whether it’s a lottery or whether it’s inheritance or whether it’s you know, a public company, a stock goes public and yet options or whatever it is when you come into sudden wealth, it can be extremely overwhelming.
And it’s a really good time to make sure that you have the right advisors, the right tax advisors, the right legal advisors, the right financial advisors, because your instincts may very well not lead you down the right path. And unfortunately, people who are wealthy for their whole lives or their whole adult life.
Learn to cope with understand, manage and handle all of these various things. Whereas folks with sudden wealth often wind up making some horrendous decisions and sometimes wind up bankrupt, which seems impossible. It seems like how could you even spend that much money, but people do. So mark, I hope I’ve answered your question.
I think I’ve answered it a couple different ways. I would also tell you not to play the lottery because you’re better off doing a lot of other things with your money, but if you must play may you win. I’ll be happy for you, Mark. Thanks for your question. If you’d like to send us a question, which we might answer in a future episode of office hours, post it on our Facebook page or tweet us at @Brotmanplanning. If you like, what you hear, please subscribe to our podcast and leave a rating on Spotify or wherever you listen to your favorite shows. Please also check out our books, workbooks and online financial literacy resources at brotmanmedia.com. Thanks for coming to office hours.
Be sure to tune in for new content every Thursday. For now, this is your host, Eric Brotman, reminding you don’t retire. Graduate!
[00:06:18] Narrator: Securities offered through Kestra investment services, LLC, Kester IS. Member, FINRA SIPC. Investment advisory services offered through Kestra advisory services, LLC. Kestra AS an affiliate of Kestra IS. Kestra IS or Kestra AS are not affiliated with Brotman financial or any other entity discussed.
