Canadian teenager Charlie Lagarde had an enviable decision to make – as cash in your lottery prize.
Ms. Lagarde hit the jackpot after the purchase of a scratch lottery ticket for the first time to mark her 18th birthday.
She had the choice between taking a C$1 million (US$780,000; £550,000) sum or the receipt of C$1,000 a week for life.
She chose the tax-free weekly payment. BBC news asked two financial advisors to discuss his decision. Here is why they believe she took the best option.Teenage kicks
The fact that she is so young means that she has “overwhelmingly” made the right decision, according to experts.
From a purely mathematical, it might take a little more than 19 years to reach a million by taking $1,000 a week. Living in your 80 would raise more than $3 million in total throughout his life.
“This eliminates the temptation to spend on things that feel like more of a priority, at the age of 18 years, of what could later in life,” said Sarah Coles, of the united kingdom of the investment company Hargreaves Lansdown.
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However, the individual circumstances should not be forgotten.
“If Charlie had accumulated a debt of $ 100,000 that you could have chosen to take the lump sum and get rid of the huge associated costs of interest. This could be the same if she was paying a mortgage,” said Tom Selby, senior analyst of pension company AJ Bell.
“Assuming that this is not the case, it seems that Charlie has made a very wise decision”.
Even so, the decision is a little more complicated than simple math. This is why.How to invest the millions?
Some people may consider the millions of dollars and the investment to get a better return. That still would not be a better financial option for the teenager who takes the weekly payout, according to Mr. Selby.
Here are their calculations, assuming an investment return of 5% (which represents a realistic, but not guaranteed return):
If she spends nothing and invests the payments per week ($52,000 a year), compared to taking the $1 million lump sum and the investment, that she would be better at the age of 68 years. By the age of 82 years, she would have $24.9 m compared with $23.8 m
If she chose the $ 1 million lump sum and withdrew $52,000 a year, she would be without money, at the age of 83 years. Since Canadian life expectancy is 82 years, according to the World Bank, the withdrawals would last for a lifetime. However, it is important to note that the $52,000 would be taxable versus tax-free weekly prize, which is the crucial point
If she spends half of the $ 52,000 each year and invests the rest would reach the $1m level by the age of 39 years and by the age of 82 years, there would be a lump sum of $12.5 m
Alternatively, if she had invested $1 million of the lump sum and taken out of the same withdrawal each year of $26,000, she would be worse, for the 75 years of age and fund value at 82 years of age, it would be slightly lower at $12 million. In addition, the $26,000 would be taxed as income, while the weekly prize is not
The cost-of-living effect
Ms. Lagarde is young, and over time the value of your prize will be devoured by inflation – the effect of the increase in the cost of living.
So it would be better to just take the millions and the expenditure is now, before the start of the fall in value in real terms?
No, according to Ms Coles, analyst at Hargreaves Lansdown.
It is impossible to know the future rate of inflation. However, a realistic estimate of a 3% inflation rate would mean that in 50 years, the $1,000 a week can be a value of less than $250 a week in real terms in the last 50 years.
“Therefore, to take it until the age of 47 years, to hit $1m in real terms, but even after taking inflation into account, their income throughout the life of the victory could be more than $1.5 m,” she said.An option for everyone?
This all sounds like a different world to most people. After all, almost nobody wins the lottery.
However, there are some options similar to make many people who have saved hard during their working life when they reach retirement. Many will offer a lump sum or a regular income for life, known as an annuity.
Ms Coles gives an example for someone in the uk heading for retirement.
“A woman who retires at age 65 with a pension pot of £ 1 million, for example, you can provide a level income of £53,000 a year for life. This sounds much less exciting than 1 million pounds, but it means I was going to break even at the age of 84 years – with two more years of average life expectancy in the bag,” he said.
Mr. Selby urges people to take their time in making those important financial decisions.
“To decide whether taking a small, regular income or a large lump sum, it can be extremely difficult. As human beings, we have a tendency to prefer to receive in the last instance, to a lower number before a higher total amount later. In the jargon, this is known as the discount hyperbolic,” he explained.
“If you’re lucky enough to be in a position like that of Charlie, the key is to think about all the factors that affect the value of your money and not make any rash decisions.”