The Lottery May Be a Stupid Tax

…but taking the annuity over the lump sum is even more stupidererer.

DENVER – Colorado’s first Powerball winners claimed their prize on Wednesday.

Two families went in together to buy the winning ticket for the October 10th drawing. They will now share the $20 million prize.

The winners are from Germany, but are originally from Poland and came to Denver in 2002. They chose the annuity option which spreads the jackpot over 29 years. They picked up their first check Wednesday for $365,602.

Through a translator the winners said they plan to “stay cool,” travel and maybe buy a house someday.

I ran some quick numbers in an Excel spreadsheet, estimating that money received could be compounded at 8% annually, and that $200,000 a year would be withdrawn for supporting a better lifestyle. After 29 years, you’d have something like $10 million more by taking the lump sum rather than the annuity (assuming I didn’t screw up some numbers, always possible).

Hell, assuming that after splitting the money and paying taxes, you have $5.5 million leftover, that would be throwing off $440,000 a year if you earned an 8% return. Just by sitting on the money, you get more per year than from the annuity.

I guess they don’t teach math very well in Germany and Poland.

However, the State of Colorado thanks you, as that bad decision can pay for a lot of open space and public parks upkeep.

3 Responses to “The Lottery May Be a Stupid Tax”

  1. Ed Graham Says:

    Most lump sum payouts are less than half the jackpot. But still.
    Haven’t seen you post on the Tennessee 17, BAMA 41 yet.

  2. andy Says:

    Yes, I took that into account. Colorado’s prize is equal to half the jackpot I believe… and then I assumed 45-50% of that would go to taxes before the winner sees a penny. Regardless, they gave up millions in the long run…

    I didn’t post on the Bama game because it wasn’t aired here in Denver (to my knowledge). :-) Perhaps I should meet up with the alumni group more often to watch games!

  3. Kevin Says:

    One thing to consider is how often people who take the lump sum simply blow through the money. Sometimes it’s smarter to take the annuity so that you limit the amount you can waste/lose. If you do some research on lottery winners you’ll find that many who took the lump sum payout are now flat broke – having wasted or been bamboozled out of the winnings. Those that take the annuity give themselves time to learn how to manage large sums of money.

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