There was a story in the news about a woman in Quebec winning a lottery payout and she chose $1,000/week versus a $1,000,000 lump sum payout.
There were some very derisive internet comments against her decision. Intuitively it may seem to be the case – inflation and “bird in the hand” mentality, but when doing the math, it isn’t a terrible choice.
There are two strong variables here – your expected rate of return and your expected longevity. The higher your expected real after-tax rate of return, the more you should take the lump sum. The higher your longevity, the more you should take the annuity.
The woman in the picture looked to be around 60 years of age.
The finance math suggests that if your risk-free rate is 6% and you assume inflation of 3%, and your marginal tax rate on returns is 40%, your break-even is around 20 years.
If you expect equity-like nominal returns at 10%, then the break-even goes to about 28 years.
There are other lifestyle variables involved here, for instance, is a dollar spent today more valuable than an inflation-adjusted dollar spent tomorrow? Does this person have a pressing need for a large lump-sum amount of money today?
Perhaps the best reason I read in the discussion was that if she takes $1,000/week that her friends and family won’t hit her up for money, as this is what happens to almost all big lottery winners.
The lottery annuity is also iron-clad and virtually like a government-guaranteed and after-tax pension.
So I can respect this decision to take the $1,000/week. It can be justified.