Week 5 Lump Sum Payout Discus

I’m working on a management discussion question and need an explanation to help me study.

Requirements:

Write a reply minimum of 150 words for each discussion1 and discussion 2

Discussion 1

If I would have earned a lottery and were asked to select an option of receiving $50,000 per year for 30 years or immediately taking a lump sum payout of 1Mn$, I would choose with the latter option of taking a lump sum payout immediately. Even though the tax advantage and the difference in net payout over 30 years could provide me a gain of 487k$ after tax over what I could get in a lump sum payout. However, the advantages of taking a 1Mn$ payout exceeds the advantages of those of payout over 30 years and provides freedom and the ability to invest money in the right places to generate profits much larger than the 540K$ before tax or 487k$ after tax over a 30 years’ timeframe.

Here, it is very crucial to understand that this option should only be chosen for people who live well within the means and do not overspend. If the individual does not believe in investments, then the right option to select is getting 50,000$ paid over 30 years. This will net to 1,117,000$ at the end of 30 years when taxed at 22% as compared to 1,000,000$ taxed at one time 37% results into net payout of 630,000$. The ability to leverage the money into scaling or developing small businesses or even investments into rental properties would help exponentially multiply the gains. The basic 6% fixed deposit interest rate with bank security from a major state or national bank from India would help earn 1.13M$ over 30 years, plus the 630,000$ capital, resulting in total payout of at least 1.7M$ after 30 years. Please note that if the investment is compounded every few years, the same way a loan is refinanced to save on interest rates, then the interest gain will be compounded and will result in a much higher pay out.

If we were to discuss, how the lump sum is calculated, the actual pay out for lump sum amount will be at 37% for 1Mn$ and 22% for the 50,000$. It varies a bit depending on many scenarios including income brackets, marital status, etc. A CPA should be able to get the most correct figure for these calculations for an individual. The regular 50,000$ payout should be the best option if the individual is particularly happy with the payout of 50,000 every year and does not prefer taking risks. Please not calculated or not, investment can always be a risk. Thus, in my opinion collecting the 1Mn$ payout is profitable over time for me than opting for the 30 years 50,0000$ fixed income.

References:
https://blog.taxact.com/lottery-tax-calculator/
https://www.investopedia.com/managing-wealth/winni…

Discussion 2:

This article is to discuss various scenarios and my opinions in case if I get to win a lottery of $1,000,000, and I get to decide between receiving $50,000 every year for a span of 30 years or taking a lump sum payout immediately. We can initially weigh the priorities in life and the need for money before taking the decisions. If we get to take all the money at one in lump sum payments, we get to have huge debts clear off and relieve the pressure. We can later pass on what has left for further investments and other basic needs. We can also proceed to invest the money to make passive investments. But this might not be efficient in the long run. In case, if we decide to get paid annually for the next 30 years, we will be having an income for the major remaining part of life. This can be efficient if we have dependents or other things to take care of. Additionally, this will in turn bring very less financial flexibility meaning there is no major sense in winning a lottery. We might not meet few emergency requirements even after winning a lottery. Also, due to depreciation in the market, the value of money may go down at the end of the span, meaning the value of $50,000 what it is today might not be what is will be 30 years down the line. By reconciling all these values, and the needs that I need to satisfy, I believe taking lumpsum and converting into intelligent investments should bring financial freedom and other powers to life.

Reference: https://smartasset.com/retirement/lump-sum-vs-annu…


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