Should I buy everyone I love exotic cars and big houses?
So what do you do if you win the jackpot?
A) Always take the cash option - the $224 million cash option is calculated as the "net present value" of $355 million paid out after 26 years... Please keep in mind the $355 million is what the jackpot is worth in 26 annual payments as stated on the Lottery website (It is the value of the Jackpot after 26 years of a fixed annuity payments at a given interest rate). Once you make the choice you cannot change your mind. Fundamental finance will tell you that the "Time Value of Money" will depreciate at the rate of inflation (normally between 2% to 3%) - so $1 today will be worth 97 cents a year from now and 94 cents two years later.
By taking the cash option and investing properly, you can protect your lottery earnings and you may even be able to make it worth more than $355 million in 26 years!! If you do not know what to do with the $224 Million cash option - hire a reputable financial advisor/wealth manager, but stay away from people that promises too good to be true returns (i.e. Bernie Madoff type people).
Then Why do they offer the 26 Year Annual Payments?
A) It only makes sense to take the 26 year Annual Payments if you feel that you are not capable of financial responsiblity. But if you make this decision and in the future you decide to change to a cash option by going through a 3rd party financial institution - they will cash out your lottery winnings at much lower than the $224 million. Also, depending on state laws, when you die the Lottery is not obligated to proceed with annual payments in your name or to any surviving members of your family. Regardless, always hire a lawyer and set up a trust fund to receive the annual lottery payments to ensure your surviving family members are taken care of by your lottery winnings.
Conclusion:
By taking the $224 Million Cash option and investing it wisely, you can make your lottery winnings last for several family generations. Investments generating between 2% and 3% annually will protect your lottery winnings against inflation. Investments with 4% and 8% returns can provide you with a nice cash flow to never have to work again and to make your $224 million cash payout potentially worth more than the $335 Million in 26 years due to the power of compounding interest. It doesn't mattter what amount you win in any Lottery Drawing - when you do win the Lottery always take the lump sum cash out and make wise fundmanetal financial decisions.
In my opinion, any investments generating 10% or higher returns is risky: Big Risk = Big Returns or Big Losses (If you have the stomach for it)!! Bernie Madoff was promising everyone 10% returns and look what happened! History has shown higher returns usually indicates higher risk involved with your money (Read all Financial News Articles from 2006 to 2011 if you don't believe me)!!
Statistics show most big Lottery Winners declare bankruptcy after 5 years!
Use money to make money... don't blow it all in one place!
But if you win the lottery and are planning to get me a nice car or house - I prefer cash so I can make my own investments or donate some to various charities... =)
Subscribe to my Blog for more simple Fundamental Financial advice. I can be more detailed or complex- but that would be boring... Untill next time - Good Luck and Have Fun with the Lottery!
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