re: Annuity or Lump? Updated for 1.6 Billion

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a winner dies before receiving all annual payments, Mega Millions will continue to pay the annual payments, as scheduled, to the winner's designated beneficiary or to the winner's estate.

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In that case I’d take annuity.

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I did laugh when he claimed 4.5% was just slightly more than inflation over the last 20 years.

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Inflation over the last 30 years is about a 2.7% average. Anyone can find something to make up the other 1.8% and then some.

This isn't Highlander...

There can be more than 1

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I made a spreadsheet... Take 325 and randomize a yearly return between 0 and 10% for 30 years... Then take the annuity schedule that you would net based on today's taxes starting with 10.365 and randomize that between 0 and 10%... Randomized 1000 times, the lump sum ranges from 900MM to 1,800MM but averaging 1,450MM. The annuity is much more stable from 1,050MM and 1,600MM averaging 1,320MM. FWIW. ETA: About 20% of the time, the annuity is more.

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So I just ran it vs actual S&P 500 total returns from 1/1/1927 to today. I ignored taxes - just used the actual gross annuity payments that increase by 5% each year from $14,600,000 to $60,000,000 by the last payment and the lump sum of $548,000,000.

I also assumed you'd withdraw $12,000,000 to spend in the first year and 3% more every year after that, but any remaining money would be saved and invested directly into the S&P 500 (ignoring fees and taxes). In either scenario you will withdraw ~$571MM over the 30 years.

In the 60 full 30-year rolling periods, the annuity payments would leave you with an average nest egg of $1.845B, a median nest egg of $1.811B, and a standard deviation of $689MM. Not too shabby whatsoever.

However, investing the lump sum and taking the same annual withdrawals would leave you with an average nest egg of $7.938B, a median nest egg of $8.179B, and a standard deviation of $4.060B.

In only 3 of the 60 annual rolling periods would the annuity have left you with a better nest egg. The lowest annuity nest egg finished at $907MM and the highest was $3.942B.

At one point your $548MM lump sum would have been down to $165MM, and the worst it ever ended was with a nest egg of $581MM. The best it ever ended was with a nest egg of $20.456B.

Let me make this simple for everyone


If you have no preference in annuity vs lump sum: if you go to a financial professional and they tell you to take the annuity, fire them immediately

Are we allowed a look at their knuckles before deciding?

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Again, the assumptions are the current tax rates and a random 0-10% return over the 30 years.

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Not accounting for negative returns makes this useless baw


You just did an extreme study of the irrelevant

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Not accounting for negative returns makes this useless baw

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Any randomized run will be useless if you don't take into account ever single factor. But the fact that I'm using the same returns for both situations, limits the deviations of my point: The annuity isn't the worst thing in the world and certainly not as bad as people make it out to be for the reasons they site. (ETA: And negative returns would impact the lump greater than the annuity since less would be personally invested and the yearly 5% increased investment is constant)

You mentioned it earlier. The real risk of the annuity is the lack trust in future taxes.