Lumpsum Lottery Selling Beats Inflation? How, What's the Math?
A famous buyer of structured settlement payments lays out the math and supportive arguments of why it is supposedly better to sell lottery payments instead of keeping long term annuities. The company explains that with paying the lottery taxes for a lottery of 1M, the annuitant would end up receiving a sum of 720,000 over a period of 20 years, which amounts to several hundreds of thousands of dollars less when discounted to today's value given inflation, near the 400,000 mark.
On the other hand, selling the payments for a lumpsum, the lottery winner would get 500,000 and then reinvest it for a "conservative" earning of 10% over the same 20 year period, amounting to a whopping 2-3M (I forgot the exact figure, I confess).
It left me puzzled. W-H-A-T??
Any discount offered by a factoring company, I believe, should be WAY higher than inflation rate.
Then, if counting back inflation lowers the sum, it should be reduced many times over by discounting by the company's rate, whatever it is.
Just as an example; if you take 1M and discount by a -- and here I'm adding CONSERVATIVE -- rate of 0.07, you would end up with less than 190,000.
But what company is foolish enough to offer a .7 rate when the standard is 9-12 and even much higher?
Given a .12 rate, the payee would get less than 75,000. Are they kidding, or what? Where's the 500,000 figure come from?
Moreover: by reinvesting you have to consider everything: risk, commissions and fees, inflation of course, taxes. Ultimately, what are you left with?
Is it that simple putting the lumpsum advantage over the periodic payments?
Don't get me wrong. I'm not opposing here the lump sum option which may be justified in the given circumstances. At least when only partial payments are sold.
But why fool people with deceptive math and false figures?
Or, perhaps I'm mistaken here somehow? Enlighten me.