Is it better to take the cash option in a lottery or the 26 year option?

Answer 1

Abiding Dude touched on the key issue - inflation. Say, you won a $10 million jackpot. We'll over the 26 year period, you'd get $10 million in nominal terms, but in terms of real purchasing power, you'd have a lot lot less.

I think you're talking about 20 year, it's $50,000 per million for 20 years. So if you won $10 million, you'd get $500,000 per year for 20 years. So, let's say you won $10 million and took the 20 year pay out. I'm using an inflation calculator to make the necessary adjustments. Let's say you won in 1986 and received $500,000 per year for 20 years till 2006. You would have been paid $10 million, but in terms of purchasing power, you'd only have $7.255 million in purchasing power due to inflation - in other words, you would have lost $2.744 million in purchasing power. That's a lot of money to lose.

If you take the cash out option, you don't get the full $10 million, but you have the funds NOW and can use it as you see best before inflation eats away at the purchasing power of the funds.

Just my 2 cents.

Answer 2

It generally boils down to whether you think you can beat 7-8% on your own. Lotteries get that huge amount because they buy an annuity if you pick that 26 year option. Say you have a $10 million jackpot. Well, it doesn't cost $10M to buy an annuity that will pay you $10M spread out over 26 years. It might only cost $5M. So, if you choose cash value, they just hand you the amount it would cost to buy a $10M annuity. In this example, they'd give you $5M.

Annuities give that $10M amount because the company backing it has investments that guarantee at least $10M after 26 years with that initial $5M investment.

Annuities as investments are pretty conservative. If you're not a big risk taker or are bad with money, it may be better to get that guaranteed stream of income. However 26 years is a long time. Many people want the money now, so they can decide how much they want to blow for fun and how much to invest. If you really do stay disciplined and invest most of it, it's pretty easy to beat that annuity amount.

Answer 3

Generally the cash option on government lottos is less than the 26 year option. That's why the government offers two options. The other thing you want to look at is how money affects you. 80% of the people that win the lotto or get large settlements loose that money. They just can't handle it. If those winners was the real reflection of the population as a whole, they answer is to take the multi-year option.

If you can handle money, you will probably make more money by taking it all at once, taking a little bit for yourself and investing the rest.

Answer 4

Over the long run, you end up with the same amount of money. I personally would take the cash option. Who knows what will happen during the course of 26 years.

Answer 5

I agree with the other response. You have to consider that if you wait for the annuities, they break it up but you are getting the same absolute amounts irregardless of inflation. Who knows what will happen in 26 years? You might die, the market may crash, a million-and-one different things could happen and you could have been MUCH happier just getting a fraction of "your" money.

Answer 6

The technical answer is what is your re-invesment rate? The cash option is calculated assuming a certain discount rate. If you think you can re-invest the upfront cash at a higher rate of return, then you definitely take the money upfront.

Answer 7

CASH remember you are dealing with a gamming contractor on behalf of a Government, historicly neither can be trusted