Is $1,000,000 up front or 100 payments of $10,000 a month a sweeter deal? This is a question I often ponder. On one hand, a million dollars up front is in theory a better deal because it allows us to make much more money if we invest it correctly. It is also the most flexible because it gives us the maximum choice. We can always put it in an investment that pays $10,000 a month and there’s even a good chance that we will get more than 100 payments of $10,000.
On the other hand however, having $10,000 a month is so comforting. Even though we can set it up to get $10,000 a month with the big one time payment by putting it in investments, not many people truly has the discipline to do so. Just imagine whether anyone will be able to keep themselves from spending anything if $1,000,000 was handed to them. If we’re like most people, we will at least spend some money after getting a HUGE windfall. Perhaps it’s a new car, an upgraded kitchen, or at the very least some new clothes or gadgets. This is natural and is probably encouraged (assuming the spending is controlled), but it definitely does not make financial sense.
As with anything, there are always pros and cons. It would be interesting to see whether Money Ning readers prefer to vote below! Any comments are welcomed too!
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{ 11 comments… read them below or add one }
Call me crazy but I’m actually one of those that would rather take 100 payments
Yes, I would definitely prefer one time 1 million $$$. This way I would be able to more flexible manage it.
The simplest and no risk way would be to allow myself to spend 10 000$ a month while rest works on my saving account. It is much better solution than getting 100 times 10 000$ per month, right?
I would love to get it all at once. I would be a lot more motivated to invest a large section of it. With $10,000/month coming in, I might not be motivated to continue working….
All up front. Know why? Inflation! Over time those $10,000 payments will be worth less and less. Even over one year the money will be worth less.
That’s a very tricky question. I recently read an article about a lottery winner, who sold his annual payments from the lottery to a firm for a lump sum amount. He then invested it all in tech stocks in late 1990’s/early 2000’s.. He lost 98% of the money.
Many people believe that they can manage to make money off the money by investing it. It’s a common psychological thing that makes people overestimate their own capabilities.
From a tax perspective though getting 1 million right away will definitely make you pay high taxes right now..
100 monthly payments means that you only need to wait for your money for 8 years or so. That way you will have time to assess your new situation, get a plan and dollar cost average into your investments.
Personally I would love to get the $1,000,000 upfront. But that’s because I know how to invest it now(or I think I know how to).
But I won’t be able to generate income of 120,000 from the 1 mln. 40,000/year sounds much more achievable.
Hi, I am an Actuarial student in Melbourne, Australia.
I can tell you, without a doubt, that $1m right now is better than $10,000 once a month for the next 100 months.
If we assume that the return on invested funds is a terribly-modest 2% then the present value of the 100 $10k payments is only $198,639.
The only circumstance where this would not be the case is where the interest rate is well under .1%pa, not terribly likely at all.
Rob.
Between inflation, time-value of money, and the flexibility as to what qualitative types of investments you can consider, it’s not close for me either — I take the money up front. I guess for our family, I’m not all that worried about the risks of the splurge or losing it all in tech stocks. It’s interesting to see the actuarial calculation!
Knowing that we aren’t always as displined as we need to be, the $10,000 per mo. sounds good.
It is funny, yesterday we were talking about what kind of income $1MM invested would bring. We assumed a low average 4% return and came up with $40K. If you then keep working, you do have a good chance at having the $1MM grow.
Turns out there was some problem with my earlier maths, sorry. That’s why I shouldnt do maths at 2am in the morning
Anyways, let’s assume that our investments make an average of 6%pa…
This means that the present value of 100 payments of $10,000 each months works out to be $785k.
This means that even if you received a lump sum payment of $1m, and splurged with $200k worth of purchases, you would _still_ be better off in the long run.
Rob.
Money up front every single time. I’d pay off the house, and figure out what I really want to do with my life. We’d still have at least $600-700k after taking care of the house and setting up our parents.
I wouldn’t live off of the money though… I would just consider myself very lucky to have gotten ahead in the retirement game. I would keep working until I figured out what I really wanted to do.
It has to be the big one time payment!