The Mega-Million Dollar Question

December 20, 2013

Adam Polakov
Tax Principal

Recently, a 56-year-old woman from Stone Mountain, GA won half of the second largest Mega Millions jackpot in U.S. history—$648 million. The odds of hitting the jackpot are 1 in 259 million. Who would have thought one of the winning tickets would be located at a newsstand in Buckhead, Atlanta?

So now the mega-million dollar question on everyone’s mind is….will she take all the money at once, or take it in payments?

In my opinion, it’s all about the time value of money. Do you want $100 million today in your pocket (after taxes) or do you want $7 million every year for the next 26 years? I would definitely want $100 million today. The $7 million in the 26th year isn’t going to be worth nearly as much as it is today. For example, it takes $1 million today to buy what $375,000 bought you in the mid-1970s. Plus, think about all of the lost investment earnings that would have compounded over those years. At just a 5% rate of return, you are earning $5 million a year without even touching your principal. But I suppose there are people out there who don’t feel that they can handle all that money at once so they want to make sure they still get something many years down the road.

Fortunately, the lucky Georgia native appears to recognize the importance of time value of money, too. It was reported that she took the lump sum payment option–$173.8 million before federal and Georgia taxes.