It has been widely reported that David Sneath, who had worked in a Ford Motor Company warehouse for 34 years, won a $136 million Mega Millions jackpot on April Fool’s Day - his 60th birthday.
According to Wikipedia, Mega Millions pays out in either 26 annual payments or one lump sum. If a winner chooses the lump sum, the payment is much less than the reported amount of the jackpot.
If Sneath had chosen 26 annual payments, the annual payment would be $5,230,769. He did not choose the 26 annual payments. He chose a lump sum payment of $84.3 million.
Is that a wise money decision? Depends. We can analyze the numbers to see if it’s an optimal decision financially, but there are also some individual factors (such as his tax situation) and intangible factors (such as his desire to give four of his co-workers a million bucks) that may drive the decision. Since we can’t analyze the intangible factors, all we can do is look at the numbers.
The Numbers
To analyze whether the lump sum payment is the right choice, I calculated the rate of return he would need to recognize in order to turn $84.3 million into a stream of 26 equal annual payments of $5,230,769. It’s a very simple calculation if you have a spreadsheet or a financial calculator.
The answer is 3.924%. In other words, if he can invest his money at a rate of return greater than 3.924%, then he made the right decision to take a lump sum payment. His rate of return must take into account taxes of course.
Two Pieces of Unsolicited Advice for Sneath
First, be aware of the gift tax consequences of giving $1 million each to your co-workers. You will likely owe gift tax upon making gifts of that magnitude.
And finally, don’t be a dufus like Richard Hatch and neglect to pay your taxes. It’s too late to blend in. The IRS isn’t going to forget about you.