The highest jackpot in the history of the world will take place at 11pm EDT tonight when Mega Millions will raffle off a $1.6 billion grand prize.
Of course it’s only $1.6 billion if you take the payments over 30 years. If you want the payments in a lump sum today you would get $904 million.
DDF member farmbochur made this spreadsheet to calculate just how much you would get each year and what sort of interest you would earn over 30 years. It shows an initial annual payment of $24MM in year one which grows to a $37MM payment by year 10, a $60MM payment by year 20, and a $99MM payment by year 30.
He calculated an implied interest rate of 3.45%.
That’s not an amazing rate, but it’s a decent rate of return considering that there is zero risk of losing the funds.
Of course that’s hardly the only factor in play.
According to some estimates, 70% of people who hit the jackpot wind up going bankrupt. Taking the lump sum means you may just wind up giving it all away, overspending, investing poorly, etc. By taking the annuity you can mess up and spend your $24MM in year one, but you’ll still have $1.56 billion coming to you over the next 29 years.
Then again a good financial adviser should be able to help you invest the $1.6 billion in such a way that it earns more than 3.45% and provides you with enough income that you never need to touch that principal amount.
Another factor can be state and local taxes. If you take a lump sum payment you’re going to owe taxes on everything up front. That’s 37% to the federal government and potentially up to another 13% if you live in a high income tax location like NYC. If you take an annuity payment you may be able to move to a income-tax free state, say Florida or Texas, where they won’t tax the following 29 years of payments. Then again your original state and city may go after you for the full amount, so you’ll want to talk to a good tax lawyer about that. And of course tax laws for the wealthy can change over the next 30 years for the better or for the worse.
So, what would you do and why?