The dollar has lost an immense amount of real value in the prior 25 years (tracked against almost anything of consequential value), and the Feds / Fed weren't being anywhere near as irresponsible as they have been lately. Taking annual payments puts you up against having to match that devaluation just to stay even. I don't like what might happen to the dollar in just 25 years, particularly in the era of massively heightened currency competition likely to put even more downward pressure on it (eg bitcoin and whatever comes next).
Also, while it's possible tax rates will be lower in the future, I'd bet against that strongly given the bills we have coming due. I'd lock in today's tolerable tax rates, versus potentially ending up with Carter era 70% rates or 79% to 94% (1930s-1950s era).
The only scenario I've seen that makes any sense, in which you shouldn't take the lump sum, is if you have some personal circumstances that go beyond the sheer math of the situation (eg you have an intense lack of personal control over spending, and think you would manage smaller annual sums better, although you can still borrow against annual payments and bury yourself; or perhaps if you have an estate that you want annual payments to go through to your kids, to prevent fighting over a larger lump sum; or if you actually think you can significantly beat inflation).
I have to disagree. In this case, the lump sum and the annuity are equivalent if you get a 4.2% return on investment. You aren't going to find a risk-free investment that gets a better return than that, so the only reason to take a lump sum is if you want to invest in riskier investments. The decision comes down to risk tolerance; there is no clear cut winner.
The biggest one is the fact that the lump sum is less than the 40 year payments. If it was $500m now vs. $100m each year for 40 years you'd definitely chose the latter. Or if it was $500m now vs. $300m x2 years.
Comments
Take the lump sum every time.
The dollar has lost an immense amount of real value in the prior 25 years (tracked against almost anything of consequential value), and the Feds / Fed weren't being anywhere near as irresponsible as they have been lately. Taking annual payments puts you up against having to match that devaluation just to stay even. I don't like what might happen to the dollar in just 25 years, particularly in the era of massively heightened currency competition likely to put even more downward pressure on it (eg bitcoin and whatever comes next).
Also, while it's possible tax rates will be lower in the future, I'd bet against that strongly given the bills we have coming due. I'd lock in today's tolerable tax rates, versus potentially ending up with Carter era 70% rates or 79% to 94% (1930s-1950s era).
The only scenario I've seen that makes any sense, in which you shouldn't take the lump sum, is if you have some personal circumstances that go beyond the sheer math of the situation (eg you have an intense lack of personal control over spending, and think you would manage smaller annual sums better, although you can still borrow against annual payments and bury yourself; or perhaps if you have an estate that you want annual payments to go through to your kids, to prevent fighting over a larger lump sum; or if you actually think you can significantly beat inflation).
I have to disagree. In this case, the lump sum and the annuity are equivalent if you get a 4.2% return on investment. You aren't going to find a risk-free investment that gets a better return than that, so the only reason to take a lump sum is if you want to invest in riskier investments. The decision comes down to risk tolerance; there is no clear cut winner.
The biggest one is the fact that the lump sum is less than the 40 year payments. If it was $500m now vs. $100m each year for 40 years you'd definitely chose the latter. Or if it was $500m now vs. $300m x2 years.