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As someone else noted, typically they buy an annuity to pay you out, so risk of non-payment is not a significant factor. The annuity is better for them because

by a4isms 4y ago

As someone else noted, typically they buy an annuity to pay you out, so risk of non-payment is not a significant factor. The annuity is better for them because they don’t have to carry your payments as a liability. The annuity is often better for the recipient as well if their jurisdiction taxes the winnings. The recipient could be collecting winnings in their retirement when their income including the annuity would be low. I am not an insurer, banker, or tax consultant, so don’t take my word for how to proceed should you win such a thing!

lesuorac 4y ago
> The annuity is often better for the recipient as well if their jurisdiction taxes the winnings. Compounding interest of doing a lump-sum now heavily outweighs the tax savings. There's also nothing that prevents you from just buying an annuity using the lump sum (I'm not a tax lawyer but I'd bet there's a way for a trust to claim the ticket to avoid paying xx% taxes on it in such a scheme). https://money.com/powerball-lottery-annuity-or-lump-sum/ https://money.com/powerball-lottery-annuity-or-lump-sum/
- a4isms 4y ago
  Great comment! As your link shows, when both annual payout and lump sum are taxed at the same rate (the maximum in PowerBall’s case), the NPV of the annualized payout is less than the lump sum (working backwards) or the FV of the annual payout invested conservatively and compounded is less than the FV of the lump sum invested on the same terms. But if we’re talking about $25,000 a year for forty years versus a lump sum, it’s considerably more complicated when dealing with a sliding tax rate. $25,000 is taxed at far less of a rate than some huge lump sum, and if it’s invested and compounded yearly, the tax rate on the interest is not going to hit the max for quite a while. Whereas if the lump sum is something like $500,000, the tax rate on the lump sum is at the max, and within a decade the interest on whatever’s left will hit the max too. I should set up a spreadsheet. It may still be true for the 40x$25,000 example we’re discussing, but I need to run the numbers against a specific tax scale.
  - lesuorac 4y ago
    Jason didn't have the option for a lump sum so it doesn't exactly matter. But, the Powerball example was 1.5B annuity or 930M lump sum so a reduction to 62%. The same thing for 1M would be 620K. Assuming 40% of it goes to tax for the lump sum it gets reduced to 372K and fiddling around with the numbers in a spreadsheet still shows that as long as the interest is >6% you'd come out ahead even assuming 0% tax for annunity (which is the same results as the BI [1] article the previous money link was based on). [1]: https://www.businessinsider.com/should-you-take-the-annuity-or-the-lump-sum-if-you-win-the-lottery-2013-9 https://www.businessinsider.com/should-you-take-the-annuity-... ``` 0 25 26.75 372 398.04 1.07 1 25 55.3725 0 425.9028 1.07 2 25 85.998575 455.715996 1.07 3 25 118.7684753 487.6161157 1.07 4 25 153.8322685 521.7492438 1.07 5 25 191.3505273 558.2716909 1.07 6 25 231.4950642 597.3507092 1.07 7 25 274.4497187 639.1652589 1.07 8 25 320.411199 683.906827 1.07 9 25 369.589983 731.7803049 1.07 10 25 422.2112818 783.0049263 1.07 11 25 478.5160715 837.8152711 1.07 12 25 538.7621965 896.4623401 1.07 13 25 603.2255503 959.2147039 1.07 14 25 672.2013388 1026.359733 1.07 15 25 746.0054325 1098.204914 1.07 16 25 824.9758128 1175.079258 1.07 17 25 909.4741197 1257.334807 1.07 18 25 999.887308 1345.348243 1.07 19 25 1096.62942 1439.52262 1.07 20 25 1200.143479 1540.289203 1.07 21 25 1310.903522 1648.109448 1.07 22 25 1429.416769 1763.477109 1.07 23 25 1556.225943 1886.920507 1.07 24 25 1691.911759 2019.004942 1.07 25 25 1837.095582 2160.335288 1.07 26 25 1992.442273 2311.558758 1.07 27 25 2158.663232 2473.367871 1.07 28 25 2336.519658 2646.503622 1.07 29 25 2526.826034 2831.758876 1.07 30 25 2730.453857 3029.981997 1.07 31 25 2948.335627 3242.080737 1.07 32 25 3181.46912 3469.026389 1.07 33 25 3430.921959 3711.858236 1.07 34 25 3697.836496 3971.688312 1.07 35 25 3983.435051 4249.706494 1.07 36 25 4289.025504 4547.185949 1.07 37 25 4616.007289 4865.488965 1.07 38 25 4965.8778 5206.073193 1.07 39 25 5340.239246 5570.498316 1.07 40 25 5740.805993 5960.433198 1.07 ```
  - eru 4y ago
    It's even more complicated! Consider investment on margin. If you have an annuity, someone is probably willing to lend you money secured both by your remaining annuity and the shares or house you buy.

by a4isms 4y ago

lesuorac 4y ago

> The annuity is often better for the recipient as well if their jurisdiction taxes the winnings. Compounding interest of doing a lump-sum now heavily outweighs the tax savings. There's also nothing that prevents you from just buying an annuity using the lump sum (I'm not a tax lawyer but I'd bet there's a way for a trust to claim the ticket to avoid paying xx% taxes on it in such a scheme). https://money.com/powerball-lottery-annuity-or-lump-sum/ https://money.com/powerball-lottery-annuity-or-lump-sum/

a4isms 4y ago
Great comment! As your link shows, when both annual payout and lump sum are taxed at the same rate (the maximum in PowerBall’s case), the NPV of the annualized payout is less than the lump sum (working backwards) or the FV of the annual payout invested conservatively and compounded is less than the FV of the lump sum invested on the same terms. But if we’re talking about $25,000 a year for forty years versus a lump sum, it’s considerably more complicated when dealing with a sliding tax rate. $25,000 is taxed at far less of a rate than some huge lump sum, and if it’s invested and compounded yearly, the tax rate on the interest is not going to hit the max for quite a while. Whereas if the lump sum is something like $500,000, the tax rate on the lump sum is at the max, and within a decade the interest on whatever’s left will hit the max too. I should set up a spreadsheet. It may still be true for the 40x$25,000 example we’re discussing, but I need to run the numbers against a specific tax scale.
- lesuorac 4y ago
  Jason didn't have the option for a lump sum so it doesn't exactly matter. But, the Powerball example was 1.5B annuity or 930M lump sum so a reduction to 62%. The same thing for 1M would be 620K. Assuming 40% of it goes to tax for the lump sum it gets reduced to 372K and fiddling around with the numbers in a spreadsheet still shows that as long as the interest is >6% you'd come out ahead even assuming 0% tax for annunity (which is the same results as the BI [1] article the previous money link was based on). [1]: https://www.businessinsider.com/should-you-take-the-annuity-or-the-lump-sum-if-you-win-the-lottery-2013-9 https://www.businessinsider.com/should-you-take-the-annuity-... ``` 0 25 26.75 372 398.04 1.07 1 25 55.3725 0 425.9028 1.07 2 25 85.998575 455.715996 1.07 3 25 118.7684753 487.6161157 1.07 4 25 153.8322685 521.7492438 1.07 5 25 191.3505273 558.2716909 1.07 6 25 231.4950642 597.3507092 1.07 7 25 274.4497187 639.1652589 1.07 8 25 320.411199 683.906827 1.07 9 25 369.589983 731.7803049 1.07 10 25 422.2112818 783.0049263 1.07 11 25 478.5160715 837.8152711 1.07 12 25 538.7621965 896.4623401 1.07 13 25 603.2255503 959.2147039 1.07 14 25 672.2013388 1026.359733 1.07 15 25 746.0054325 1098.204914 1.07 16 25 824.9758128 1175.079258 1.07 17 25 909.4741197 1257.334807 1.07 18 25 999.887308 1345.348243 1.07 19 25 1096.62942 1439.52262 1.07 20 25 1200.143479 1540.289203 1.07 21 25 1310.903522 1648.109448 1.07 22 25 1429.416769 1763.477109 1.07 23 25 1556.225943 1886.920507 1.07 24 25 1691.911759 2019.004942 1.07 25 25 1837.095582 2160.335288 1.07 26 25 1992.442273 2311.558758 1.07 27 25 2158.663232 2473.367871 1.07 28 25 2336.519658 2646.503622 1.07 29 25 2526.826034 2831.758876 1.07 30 25 2730.453857 3029.981997 1.07 31 25 2948.335627 3242.080737 1.07 32 25 3181.46912 3469.026389 1.07 33 25 3430.921959 3711.858236 1.07 34 25 3697.836496 3971.688312 1.07 35 25 3983.435051 4249.706494 1.07 36 25 4289.025504 4547.185949 1.07 37 25 4616.007289 4865.488965 1.07 38 25 4965.8778 5206.073193 1.07 39 25 5340.239246 5570.498316 1.07 40 25 5740.805993 5960.433198 1.07 ```
- eru 4y ago
  It's even more complicated! Consider investment on margin. If you have an annuity, someone is probably willing to lend you money secured both by your remaining annuity and the shares or house you buy.