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

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This is only correct under the assumption that you aren't investing your annuities, which is silly.

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No, he was responding to a guy that said growing the $5M by 50% in five years would require some very risky investments, while it would actually only be a 8.5% return. It has nothing to do with the alternative option in the OP.

On a side note, people are nuts talking about hypothetical tax rates and rates of return in this thread. The main assumption that has been overlooked: Do annuity payments continue after death?

If not, well that is quite a risk you run taking an annuity.

If indeed they do, does your estate have the sufficient funds to pay estate taxes (assuming the estate has to report the NPV of the future annuity at the time of death)? What happens if you die in the first 3 months? You would be sticking the beneficiary with a large tax bill that they would be unable to pay, unless they were quite wealthy themselves.

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I also have a 7 million dollar receivable I can borrow against at next to nothing right now if I felt so inclined.

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Define next to nothing. I would think you pay 7-8% on that loan, easily. It is hard to borrow against cash for a rate better than that.

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It would be pretty unwise to turn down the 7.5MM guaranteed in life/death over 5 years.

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I'm not sure how you can jump to that conclusion. Maybe it is, maybe it isn't, it depends on risk tolerance.

I take the lump sum all day every day. Forget interest rates, investment strategy, whatever. Having the objective be to beat the alternative is silly; it is all about what that cash could do for you. Give me the money right now, an let me kick myself if I only wind up with $6M, rather than $7.5M in 5 years. That is a long time. You have no idea what sort of opportunities can arise in those 5 years. Psychologically, I think one would be less likely to spend part of their "nest egg" rather than just spending a monthly check.

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No, he was responding to a guy that said growing the $5M by 50% in five years would require some very risky investments, while it would actually only be a 8.5% return. It has nothing to do with the alternative option in the OP.

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Fair enough but still silly to base your argument that only one side one be gaining value on their share.

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On a side note, people are nuts talking about hypothetical tax rates and rates of return in this thread. The main assumption that has been overlooked: Do annuity payments continue after death?

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Actually I did, as did others, but I suppose you weren't looking for that in your quest to make a point.

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In the 7.5/5 scenario, do the payments continue to go to my family if I die? If not, that's the only sensible reason to take the lump sum.


This is the best point finally made.

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Define next to nothing. I would think you pay 7-8% on that loan, easily. It is hard to borrow against cash for a rate better than that.

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I would think you don't know what you are talking about.

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I'm not sure how you can jump to that conclusion. Maybe it is, maybe it isn't, it depends on risk tolerance.

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Because it wouldn't. First off, you're assuming all 5MM goes to work. It won't. Good luck with 8.5% there. You're also still assuming that the annuity isn't being put to work as well as I'm sure it would.

The numbers aren't in your favor to consider it a "wise" financial decision, but wise is a subjective term, obviously.

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"Compounded monthly" implies that the 1.5% will be divided by 12 for the monthly calculation.

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I know, but his calculation/explanation didn't account for the monthly rate. See below:

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The solution is to determine the net present value of a stream of payments over a 60 month period. With a return of 1.5% compounded monthly it's a wash--NPV is 4.98 million

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That is incorrect. With a 1.5% return compounded monthly, the NPV is $7.22M. With a 1.5% periodic rate, or 18% annually, the NPV is $4.92M when the payments are made at the end of the period, and $4.99M when the payments are made at the beginning of the period.

The deferred payout of $7.5 large is the correct answer.

Reggie Hammond did hard time for his money, are you less patient than him?

If one doesn't have heirs that might change things, otherwise love waits.

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5 now.... i may be dead within that 5 years, so....

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Worse than that, you may be a living, unsecured creditor in 1 year. That's the real risk.

$5 now. Pay off debt, pay off car, buy house, invest the majority of it now and watch the interest pile up to more than the payout of those who took the $7.5 over 5 years.

5 now..might be dead tomorrow

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

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It depends on your interest rate.

If it takes the $7.5 mil 20 years to surpass the $5 mil investment, then you need to decide if the money is for you now, retirement, or your kids'/fam's future.


If you want the money closer to the present, in 5 years or less, then the answer is do the $7.5 mil. I just think you can get more interest on the $5 mil and that will overtake the yearly installments of the $7.5 at least for some time.



ETA: I am wrong. I made a follow up post on why!

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Define next to nothing. I would think you pay 7-8% on that loan, easily. It is hard to borrow against cash for a rate better than that.

I would think you don't know what you are talking about.

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Schwab Margin Loan Rates

They would charge 6% on loans on actual securities loaned

TD Bank Cash Secured Loan

TD Bank would want 5.67%, secured with cash in the bank. That is a variable rate as well.

You call those rates next to nothing? These are also rates for liquid assets you currently posses. I would love to know who you bank with if you get materially better rates.

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On a side note, people are nuts talking about hypothetical tax rates and rates of return in this thread. The main assumption that has been overlooked: Do annuity payments continue after death?

Actually I did, as did others, but I suppose you weren't looking for that in your quest to make a point.

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Come on dude. I was not directing that at you, but yes, I was trying to make a point, regarding the presence of estate taxes, that I did not see anyone make before, and it is a huge consideration here.

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I'm not sure how you can jump to that conclusion. Maybe it is, maybe it isn't, it depends on risk tolerance.

Because it wouldn't. First off, you're assuming all 5MM goes to work. It won't. Good luck with 8.5% there. You're also still assuming that the annuity isn't being put to work as well as I'm sure it would.

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I'm not assuming anything, this is what I said:

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Forget interest rates, investment strategy, whatever. Having the objective be to beat the alternative is silly; it is all about what that cash could do for you. Give me the money right now, an let me kick myself if I only wind up with $6M, rather than $7.5M in 5 years

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Tell me where in those words it looks like I am trying to compare returns on the two options. I am literally trying to argue the opposite. Like you said, the argument is quite subjective; the right answer cannot be gathered from excel. It is a personal decision based on risk tolerance.

I mean besides, at 8.5%

the PV of the annuity is around $5.9M
the FV of lump sum is about 7.5M

Any higher, those figures converge, any lower they grow apart. By saying one is more wise than the other would suggest that you can predict the future.

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Good luck with 8.5% there.

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So now it would be difficult to get an 8.5% return, but you are suggesting that taking a loan for about 2% less than that against a receivable would yield a successful investment? Besides, 8.5% is not way off from average market returns; as others have mentioned, when you invest is important.

Again, there is no right or wrong answer here, to assert that there is, is a bit foolish IMO.