re: Would you choose $5 MILL in one check today, or $7.5 MILL paid over 5 years?

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All of your examples only include a simple compounding interest rate and not dividends, capital gains, etc. they aren't based on real world scenarios

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I don't...no. Nevermind.

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That is probably because you are using 6 year annuities

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Yeah I realized that after I plugged those in

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Regardless, you do notice that those figures are converging from 10 to 20% right? Which is the point that I made. The higher interest rate surely has an effect here, as it is compounded each year, and grows at a marginally faster rate with each increase in return %.

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I absolutely see your point and understand where you're coming from, but my point when saying interest rates don't matter is that for the most part, they don't. It took you to 20% to get there. Nobody in their right mind is going to project a 20% annual return year over year, so anything less than that is irrelevant. It's still a losing scenario. This is coming from a moron, so take it FWIW.

You're hoping to hit homeruns year in and year out just to make your point. That's just not a realistic expectation and it would be "unwise" to hope for that when you can just take the sure thing.

You just have to understand you don't lose until you pull out. Investing is and growing wealth is about accumulating assets. So at a young age you can be riskier wanting taking more ups and downs. But those downs don't really mean you lost (your shares/assets are still there), but that buying more shares is cheaper for the time being. When I find that someone is risk adverse at a young age it's because they don't know how the market works fully which is understandable. Know also with that is you really should be looking at tax implications in retirement also which is why I said annuities and municipal. Is there a way to private message on here? I love talking about it and could give you some more tips too.

I would take the 5 and I would invest half of it in low risk mutual funds and then take the other half over to my friend Asadulah who works in securities.

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I think it is because your perceptions about market returns are similar, and therefore are choosing to take the option that you think will yield the highest return

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I'm basing what I think on the likelihood of one options outperforming the other; in this case, there is no question that the 7.5 million is far more likely to outperform the 5 million. I don't think the 8.5% return expectation is outrageous, but even if that is a reasonable expected value for a 5 year investment, there is only a 50% chance that will even reach the 7.5 million. If even a fraction of the of the 1.5 million is invested annually, even at a lower rate, the probability of the 5 million outperforming decreases below 50%.

So in terms of investment performance, the 7.5 million is a superior answer both statistically and logically. In addition, just because there are rare scenarios where that may not be the case, doesn't negate the superiority of the 7.5 million.

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You just have to understand you don't lose until you pull out

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This advice cannot be said enough in times like these; remind myself multiple times per day.

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When I find that someone is risk adverse at a young age it's because they don't know how the market works fully which is understandable.

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Agree with this as well. I have found it beneficial to invest my IRA's in more risky investments than my brokerage, because there is less money in there, and I am inclined to check it less. Also, since these investments will presumably grow more over time, you get to keep more of the tax benefits (if all goes to plan that is).

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Is there a way to private message on here?

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There is not, people usually just leave email addresses and ask the other person to shoot them a message that way.

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I'm basing what I think on the likelihood of one options outperforming the other; in this case, there is no question that the 7.5 million is far more likely to outperform the 5 million.

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This is another way of saying the exact same thing I said; you think the return will be higher on the annuity than lump sum. I get it, you think that the lump sum will have a tough enough time catching the annuity, and that is before you invest any of the annuity payments. I am and have been on the same page with you all there. Again, note that I am not arguing for the lump sum, or against the annuity, but there are other considerations that need be made when looking at expected returns.

Bond Rates per Yahoo

If you look at this table, as I am sure you are familiar with based on your knowledge you have displayed thus far (you too Afro M-A-N), you will see that for the same class bond, rates of return are higher for the longer investment horizon. For Risk-free assets, the spread is about .75% for a 2.5 yr (backed into) and 1.5 for 5 yr. So even for risk-free, you get a larger return for longer time period invested (2.5 years based on the annuity, all funds being invested for about half the duration).

2 yr AA bonds offer roughly 1% lower yields than 5 yr AA bonds.For A-rated, its about 1.1% (2.45% vs 1.38%). The point here is that as risk increases, so does that spread between the different terms on the same bonds.

Given the same exact assets, I draw a few conclusions: As time invested increases, return increases, and as risk increases, that spread increases.

I take it from nearly everyone's comments, that their expected return on their portfolio would be at minimum 5%. So I think it is fair to say at that level, we could assume the spread (liquidity premium) would be at least 2x that, let's just say 2%.

I don't have to do the math, even at 5% vs 7%, the annuity still wins. But, I also don't have to do the math to know that the future value of the annuity is less than $2.5M more than the lump sum. Bump that up a few percentage points, the spread increases and those figures converge even more.

Therefore, to my original point that you quoted, based on your perceptions of return on the market have brought you to the conclusion that the annuity is the clear winner. How you believe your investments will perform, it's annuity all day. I assume this is based on personal experience in investing. I would also think that a lot of you are thinking you would keep working the same job after the award...that's very conservative.

All of this is completely logical, I am not arguing that. But I do believe this is all based on US stock market performance. It is after all the most reliable indicator of a moderately risky asset's performance. But, these investments are available to everyone, they can be bought/sold at a whim, and require a very minimal amount of due diligence to make an investment decision; for the most part, most have that work has already been done for you.

I suppose the bottom line is this: Do you really think that with $5M, in your hand, right now - that you could not start a business that yields more than a 7% return? If not, no shame in that whatsoever; it's risky to start a business. But for a lot of people, $5M is enough to realize a dream, and I sure as hell wouldn't wait 3-5 years to realize such a dream.

Rich people don't get wealthy investing in the S&P; they start businesses that eventually get registered and offered, becoming part of the S&P.

I sure hope I made my point.

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Bump that up a few percentage points, the spread increases and those figures converge even more.

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Sure. But the greater the spread the less lesser the probability of it happening.

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Rich people don't get wealthy investing in the S&P; they start businesses that eventually get registered and offered, becoming part of the S&P.

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The comparison isn't between-individuals. It doesn't matter whether Carl Icahn can invest the 5 million better than me with 7.5 million or vice versa. It's whether I can better invest 5 or 7.5 and whether Carl can better invest 5 or 7.5. I would say that regardless of the investor and his/her investment capabilites, the probability of having more money after 5 years will greatly favor the 7.5 million across the board.

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$5 MILL in one check today, or $7.5 MILL paid over 5 years? by The Mick

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It depends on the payment schedule. What if $7.5 mill "paid over five years" is paid beginning in 2042? Hmm?

Contracts, Bitches!

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Do you disagree that the probability decreases and inhibits the expected value of the 5 million invesment?

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No, but I thought it would be pretty clear that I knew that, based on the article I have written in this thread. I mean I even said that the spread increases as risk increases.

However, remember that the spread is only present because of the length of time horizon for the exact same asset. Point being, if you are invested for a longer period of time (at the onset of the investment), and each option is invested in the same exact asset, the one invested longer will receive a "liquidity" premium. So, if the objective really is for one option to "beat" the other at the end of five years, using the same investment strategy, it is worth noting that the 5-year lump sum investment will objectively yield a higher annual return.

As you said yourself, this analysis is only done by individual, if you can better invest one option or the other. At a certain level of risk, that spread will make the 5-year investment more attractive.

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I'm only arguing the points about the quantifiable expected value at the end of the duration of this 5 year hypothetical.

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I know, and that is what I meant with the text you quoted. But for reasons already stated, the reason for picking $5M are not limited to "life being to short". You can start nearly any business with $5M; with the annuity, you may not be able to start it at the beginning, and the ship might sail by the time you have enough capital with the annuity.

There are countless other opportunities that having more cash available, right now, offers that could affect this decision. Some of which can occur within the same exact investment strategy; Vanguard offers lower expense fees for higher balance investors.

I know I have beaten this to death, but I am just trying to make this clear that there are other very real variables here that aren't being considered, and if I can maybe help one person who may happen to read this earn more on their investments in the future, it would be worth it.