Page 5 of 6

Re: $1,000 A Week For Life!

Posted: Jul 8th, 2005 12:56 pm
by Daemar
To pay you your $1000/wk, all they do is place the $675,000 into a guaranteed investment that pays out weekly (i'm guessing here), hence really you're still only getting the $675,000. By doing this, it also guarantees that you'll get the $1000/wk for 25 years because what if in 2 years they just say, yeah, we don't have any money... then you're hooped.

I say take the 675,000, spend 1/4 of it as you wish and put the rest into real estate that you can rent out and receive cash flow, OR other investments. Oil stocks were and are a good bet for investments. Avg annual rate of return is 14%.

Re: $1,000 A Week For Life!

Posted: Jul 8th, 2005 1:37 pm
by actuary
Neil wrote:I'll do the asking, let's use what seems to be a common sort of age around here, 25 and just for kicks let's guess that RFD has more males than females and go with that.

But are you sure mortality is really an issue here? How about indexing for inflation? It wasn't stated as an issue.

In recent years such annuity type payouts that are "for life" generally provide for the remainder to be paid out to a beneficiary if someone expires before an agreed upon term. So even the person that checks out after 2 months of the annuity, their beneficiary would get the rolled up lump sum (based on the supplier's probably conservative rate assumptions)

The company supplying the $1000/week knows that even if they had to continue paying into years 40 through 60 of that commitment $1000/week then will be more nominal than today, more like $125-$250 in "today's money".

I'm in the camp that says take the lump sum so you can structure it to last perpetually or to draw down over a period of time, owner's choice.
I understand your points and will try to answer them as best as I can.
Firstly - the present value of $1,000/week for life, guaranteed for 20 years (not 25 years - check the olgc rules) at current interest rate and mortality assumptions made by the CIA (Canadian Institute of Actuaries) for a male aged 25 years is $998,201. This is what it would cost the OLGC to purchase an annuity from a major insurance company for the above person.

Mortality is a huge issue in calculating the value of an annuity (or pension, as this prize is basically a pension). Here is a quick example of the present value of a $1 (paid at end of the year) annuity:

$1*(1+i)^-1*probability of survival to year 1 + $1*(1+i)^-2*probability of survival to year 2 + ....

The $1,000 is not indexed. If it were, the above value would increase. The fact that it is not indexed does not make it a 'bad deal'. The present value is almost $1 million dollars and that takes into account that it is not indexed.

Essentially, in terms of present value, a 25 year old male would be better off taking the $1,000/week for life than the lump sum $675,000. If you could do it, you could sell the annuity to someone and get at least $900,000 for it (like a bond).

Re: $1,000 A Week For Life!

Posted: Jul 8th, 2005 2:03 pm
by manho
actuary wrote:I understand your points and will try to answer them as best as I can.
Firstly - the present value of $1,000/week for life, guaranteed for 20 years (not 25 years - check the olgc rules) at current interest rate and mortality assumptions made by the CIA (Canadian Institute of Actuaries) for a male aged 25 years is $998,201. This is what it would cost the OLGC to purchase an annuity from a major insurance company for the above person.

Mortality is a huge issue in calculating the value of an annuity (or pension, as this prize is basically a pension). Here is a quick example of the present value of a $1 (paid at end of the year) annuity:

$1*(1+i)^-1*probability of survival to year 1 + $1*(1+i)^-2*probability of survival to year 2 + ....

The $1,000 is not indexed. If it were, the above value would increase. The fact that it is not indexed does not make it a 'bad deal'. The present value is almost $1 million dollars and that takes into account that it is not indexed.

Essentially, in terms of present value, a 25 year old male would be better off taking the $1,000/week for life than the lump sum $675,000. If you could do it, you could sell the annuity to someone and get at least $900,000 for it (like a bond).
from the words of an actuary.... i feel smart now that i voted 1000/wk

Re: $1,000 A Week For Life!

Posted: Jul 8th, 2005 2:37 pm
by grant
actuary wrote:If you could do it, you could sell the annuity to someone and get at least $900,000 for it (like a bond).
But you cannot sell it, can you?

I have a suspicion that such an annuity for the "average" lottery player is about... $675,000.

Re: $1,000 A Week For Life!

Posted: Jul 8th, 2005 2:54 pm
by sumfunny
I've actually seen TV ads, US though that say that they will provide a lump sum in exchange for your peridoical winnings.

Re: $1,000 A Week For Life!

Posted: Jul 8th, 2005 3:36 pm
by sumrandomguy
i'd take the 1k/wk. if i'm presented w/a huge sum of money at once i probably wouldn't do anything (as i'm still a student) and i'll sacrifice my education and future. whereas, 1K per wk is good, but it isn't good enough to get everything i want so i'll still hafta work for most things :|

Re: $1,000 A Week For Life!

Posted: Jul 8th, 2005 4:57 pm
by Hoang-Viet
me and a friend has this joke theory if you win the $1000 for life they'll kill you, i know it's dumb but we got a cheap laugh out of it lol

Re: $1,000 A Week For Life!

Posted: Jul 8th, 2005 5:45 pm
by grant
sumfunny wrote:I've actually seen TV ads, US though that say that they will provide a lump sum in exchange for your peridoical winnings.
Yes, as have i, but the questions are:

1) are there such companies in canada? I haven't found one.
2) can annuity payments be subjugated? (those ads mention insurance payments)
3) How much would they give you? Obviously they take a hefty cut off for profit, all those fancy commercials, plus their investors will demand a fat % return

...
I think the real question is... what do you want to do with your life?

if your goal is to buy a business or some other grandoise scheme, of course you want the money now... even if it costs you some % over the long term

if you goal is to live lazy and milk every penny, then apparently, the $1k/wk is the right choice

Re: $1,000 A Week For Life!

Posted: Jul 9th, 2005 3:18 am
by Neil
actuary wrote:I understand your points and will try to answer them as best as I can.
Firstly - the present value of $1,000/week for life, guaranteed for 20 years (not 25 years - check the olgc rules) at current interest rate and mortality assumptions made by the CIA (Canadian Institute of Actuaries) for a male aged 25 years is $998,201. This is what it would cost the OLGC to purchase an annuity from a major insurance company for the above person.

Mortality is a huge issue in calculating the value of an annuity (or pension, as this prize is basically a pension). Here is a quick example of the present value of a $1 (paid at end of the year) annuity:

$1*(1+i)^-1*probability of survival to year 1 + $1*(1+i)^-2*probability of survival to year 2 + ....

The $1,000 is not indexed. If it were, the above value would increase. The fact that it is not indexed does not make it a 'bad deal'. The present value is almost $1 million dollars and that takes into account that it is not indexed.

Essentially, in terms of present value, a 25 year old male would be better off taking the $1,000/week for life than the lump sum $675,000. If you could do it, you could sell the annuity to someone and get at least $900,000 for it (like a bond).
I didn't realize this was a real life situation of a lottery.

So if the payout is fixed for 20 years, and the annuity can be re-assigned (sold) then presumably it can also be passed to a beneficiary.

So I don't think mortality is an issue then. If OLGC expects to pay out $1000/week for 20 years to either the winner or their beneficiary. In that scenario, mortality is irrelevant to them. If the winner dies in year 1, they still roll up the present value and pay out what remains to the beneficiary.

I think what it really is would be a choice of :

(a) "A million dollars!!!!!"
but paid out $1,000 wk x 52 wks/yr x 20 years = $1,040,000

(b) $675,000, which is the PV of a NON-mortality based annuity:
20 years fixed annuity period
$52,000 per year (= $1,000 week)
4.5% annuity rate
$675,000 present value
$ 0 future value

I believe annuity rates today are right at about 4.5%

Otherwise the OLGC would just offer the winner $998,201 lump sum or the $1,000/week annuity. They have no incentive to reduce the value of the winnings by $300k just because of which payout option the winner selects.

Besides, if the winnings were mortality based, the lottery wouldn't be fair to all players. Depending on your age you'd be entitled to a different sized jackpot, and age discrimination is not something a lottery commission would be interested in doing.

Don't get me wrong, I don't question your actuarial calculation, just don't think mortality or the winner's age is applicable here, and the numbers seem to bear that out.

Re: $1,000 A Week For Life!

Posted: Jul 9th, 2005 3:24 am
by Neil
I'm jealous to hear OLGC has this lottery. This is a concept I've been pushing for about 20 years, but figured it wouldn't sell (even though it should!)

For some reason people seem to be driven by the jackpot size. I'm always hearing people say "Oh I won't bother playing, the jackpot's only 9 million." They are actually waiting for it to go up to $12 or $15 million. As if they'd turn down the paltry $9 million!

And we've seen the track record of people who win huge sums has been poor.

I'd rather see 40 people win $500,000 or $1,000,000 twice a week than some dumb slobs win such a sum that it ruins their lives.

Such a lottery would generate thousands of winners ever year, whose lives and those of the people around them would be changed dramatically but probably not lead to ruin. Winning $500,000-$1,000,000 would make most people debt free, fund their retirement, and/or give them the freedom to choose what type of work they do and how much of it.

Someone with no debts and no retirement savings obligation could easily fund college educations for themselves and family members. Or travel. Or invest and get a "second" income of about $50k per year.

Again, enough to be secure forever, or clear your financial deck at least. But not so much that they start buying gold plated hoopties and stuff.

Re: $1,000 A Week For Life!

Posted: Jul 9th, 2005 7:09 am
by Cronic
I would go for the $1000 per week, its a whopping $350 more then I make! :mad:

Re: $1,000 A Week For Life!

Posted: Jul 9th, 2005 9:26 am
by sumfunny
Neil wrote:I didn't realize this was a real life situation of a lottery.

So if the payout is fixed for 20 years, and the annuity can be re-assigned (sold) then presumably it can also be passed to a beneficiary.

So I don't think mortality is an issue then. If OLGC expects to pay out $1000/week for 20 years to either the winner or their beneficiary. In that scenario, mortality is irrelevant to them. If the winner dies in year 1, they still roll up the present value and pay out what remains to the beneficiary.

I think what it really is would be a choice of :

(a) "A million dollars!!!!!"
but paid out $1,000 wk x 52 wks/yr x 20 years = $1,040,000

(b) $675,000, which is the PV of a NON-mortality based annuity:
20 years fixed annuity period
$52,000 per year (= $1,000 week)
4.5% annuity rate
$675,000 present value
$ 0 future value

I believe annuity rates today are right at about 4.5%

Otherwise the OLGC would just offer the winner $998,201 lump sum or the $1,000/week annuity. They have no incentive to reduce the value of the winnings by $300k just because of which payout option the winner selects.

Besides, if the winnings were mortality based, the lottery wouldn't be fair to all players. Depending on your age you'd be entitled to a different sized jackpot, and age discrimination is not something a lottery commission would be interested in doing.

Don't get me wrong, I don't question your actuarial calculation, just don't think mortality or the winner's age is applicable here, and the numbers seem to bear that out.
I believe it is a minimum of 20 years but will go on until one dies. Also the 52,000 for a year is not necessarily worth 1000 each week.

Re: $1,000 A Week For Life!

Posted: Jul 9th, 2005 3:46 pm
by jjboy
ChinpokoMon wrote:Since you can only collect up to 25 years max, the present value of $52000 annual payments for 25 years, at 2.5% interest, is over $950000, which is still better than the lump sum payment ($675000).

Of course, if you can find a good investment (6% annual return or more), the lump sum may be more attractive then.
2.5%? There required return of capital should be at least 6%...

Re: $1,000 A Week For Life!

Posted: Jul 9th, 2005 4:28 pm
by Absolute
Cronic wrote:I would go for the $1000 per week, its a whopping $350 more then I make! :mad:
Yeah, I've change to the $1000/week too, after reading comments on here.

Re: $1,000 A Week For Life!

Posted: Jul 9th, 2005 4:31 pm
by wanted
See I told 1k a week was better, read my posts talking with B40 :lol: