Would you rather get one payment of $2 million or $4,000 a week for life?

[JustinTheGreat]

$2 million

$4,000 a week

[HungLikeAHorsefly]

If you took the $2 million and invested it into something like a moderately aggressive fund or blue chips, judging by historical trends you'd see about a 10% mean compound annual growth rate. That's about $4,000 per week. If you experienced a lean year where your returns didn't hit the 10% mark, you'd have a huge pot of money to dip into. If you were disciplined and replenished that money the next time a good year comes around in which you make more than 10%, then you could go on indefinitely.

So in the end, the two options are equivalent in that they'd both net you about $4k/week, *except* that you'll also have a big pot of money sitting there if you need it.

Also consider that the value of money does not stay the same. Look up the "future value of money" equation or simply the PV-to-FV ratio. Taking the $4k/week for life means the value you get from that weekly payment will decrease over time, whereas taking the $2 million allows you an opportunity to protect its value indefinitely.

[0112358]

Historic interest rates were much much higher than they are today. Even if you assume a 5% equity risk premium it’s hard to see where long term 10% returns would come from going forward. We know what long interest rates are and they’re low as hell

[HungLikeAHorsefly]

@0112358 Who said anything about interest rates? I'm talking about stock market performance.

[0112358]

Because the best predictor of long term stock performance is the current yield on long bonds plus a historical equity risk premium, perhaps adjusted for current place in the P/E cycle.

Lower yields on bonds mean equities get bid up to provide a lower yield on dividends. The ERP reflects the growth factor which remains, but there's no magic growth factor that offsets a 5% reduction in yield.

[HungLikeAHorsefly]

@0112358 Is that the best predictor, though? Also, what's the relationship between bond yield and say, a five-year mean growth rate for a particular stock in terms of bid price?

Also, we're not necessarily talking about a single stock here; regardless of what the ERP or any other metric projects, isn't it true that the typical rate of return for quite a few index funds tends to hover around 10% for the 10-year mean?

[0112358]

5 years is hard to say and market dependent, but we're projecting out say 15-25 years here. Over that sort of time frame yes, the impact of market cycles is smaller.

I'm absolutely considering an equity risk premium on the entire stock market, which has historically (say over a century) been in the 3.5 to 5.5% range. That is the total return of the stock market has been around that much more than the return on risk free assets. Short time periods can be very different due to pricing changes.

Ultimately if bonds drop from paying say 8% a year to paying 2% a year, investors will bid up the current price on stocks to compensate, as suddenly a 4% real dividend with growth looks attractive where in an 8% bond world, the stock price would be lower. The higher price in the low interest rate environment means lower expected return to equity investors.

Note we're talking in nominal terms here, if you adjust for inflation, a LOT (but not all) of the change in long interest rates vs. history is changing in inflation expectation. What that means is the real return of equities hasn't changed as much.

That said there seems to be some long term downward trend in interest rates. It's generally assumed this is effectively a wealth affect. More savings exist, hence there's more capital available, hence return to capital drops.

[Investigator]

Let's do some math:

$4,000 * 52 weeks = $208,000

$208,000 * 9 = $1,872,000

$2,000,000 - $1,872,000 = $128,000 or 32 weeks (8/13ths of a year) @ $4,000

If you were to spend the $2,000,000 at the same rate you would have had, at $4,000 per week, you would spend it all in ~9.6 years (which is a long time, depending on your understanding of "long"... and "time"). Therefore, even if technically you aren't making bank initially, it is much mathematically sound to get $4,000 a week than it is to get $2,000,000 once.

Additionally, even if you could accumulate more things more quickly with $2,000,000 initially, unless you are investing it in ways that give some long-term gains, you are actually wasting money because you don't magically get more. If you don't spend your $4,000 a week or spend very little of it, you can get considerable long-term gains with a built-in safety net since you don't ever exhaust the supply.

[Unit1]

Investigator! Haha, truly, your username fits you.

I am thinking how those 2 millions can be invested into assets: Opening a business or two small ones, buying homes, buying stocks from the stock market. I am thinking if that's done right it may be just as resourceful in 10 years if not even more than that.

[Investigator]

@Unit1 "I am thinking if that's done right it may be just as resourceful in 10 years if not even more than that."

This is true. The problem is that the average person isn't particularly financially-minded beyond "how do I pay the bills this month?" (because we don't teach people financial planning) and so wouldn't know how to handle such a large lump sum of cash. If news stories about people who've won the lottery are any indication of their reaction, the first instinct is to spend it on useless stuff they don't need and/or can't afford the upkeep on. This is objectively--pragmatically and economically--the wrong response. While $2,000,000 may be a lot, it's not so much that you can spend a lot of it and still have plenty left over.

Let's say we want to get a Lamborghini Aventador S Roadster, a car that represents wealth and status, and a lot of millionaires (particularly on social media, it seems) own them. How much is that and how many could we get? According to this listing (https://www. ebay. com/itm/2019-Lamborghini-Aventador-Aventador-S-Roadster/254567699952? hash=item3b456ad5f0:g:JPYAAOSwkhxek3mx), this car is valued at $450,000 (note: this does not appear to be an official retailer*). $2,000,000 / $450,000 = 4.44 or ~4, maybe throw in a 2020 Prius LE (https://www. ebay. com/itm/2020-Toyota-Prius-LE-AWD-e/202968331738? hash=item2f41daf5da:g:Pp8AAOSwRBpemimm), at $26K, for good measure. After you buy the car (s), it still needs gas and some place to put it, plus a bunch of other maintenance that I'm probably unaware of (I don't own a Lamborghini, so what I do know?). Really puts the scope of that paycheck into perspective, when you start trying to figure out how much you can buy, doesn't it?

[Investigator]

"I am thinking how those 2 millions can be invested into assets: Opening a business or two small ones, buying homes, buying stocks from the stock market."

Based on my albeit-limited research, this strategy is probably among some of the smartest financial moves one can make. "Don't spend more than you can afford", but then again, that's good advice no matter the circumstances. One would hope this is such an obvious "well, duh!" statement that it almost goes without saying, but maybe I'm wrong.

*The listing price can be used as a gauge for what the marketplace believes the product is/should be worth

[Unit1]

That's pretty much what i was thinking. The average person likely doesn't know how to treat money correctly.
Anyhow those who seek will find their answer one way or another.

[Civility]

2 million is not gonna last forever! It will run out eventually because I am both a spender and a saver! I like to expand my budget as much as I like to buy things that I like, but four thousand dollars every week for the rest of my life is enough to supply me until the day I die, so I'm definitely gonna choose the four thousand. But with two million dollars; I could probably buy that big fancy three story mansion I always wanted... I know for a fact that I would faint if I had this kind of money! Being stuck in poverty for so long and then suddenly walking into the life is a millionaire; is mind blowing...

[dogcrazylady1993]

4,000 a week. If I had 2 million I think word would eventually get out somehow. And once word got out everybody would suddenly want to be my 'best friend' and take them places. People would start asking me for money and try to guilt trip me into it. Not to mention I would become a target for people hacking into my bank. Someone could kidnap me for a ransom. And their is a possibility that I would spend it all on lavish things too fast too soon and I could end up spending it all.

[OlderAndWiser]

At $4,000 per week, depending on the discount rate, it would take around 10 years to surpass the $2M mark. This is a decision that should be made with the advice of a financial planner but the usual answer would be to accept the stream of payments.

[razelove]

Simple math, if you plan on surviving a decade or more you make more than the 2 million form the 4k, also you're more likely to invest it than blow it like a lump sum.

[pervertedjester]

If Lottery Winners have taught me anything it's: 1. Remain Anonymous and 2. Take the payments.

[LoU_Hades]

I would take 2 million of monopoly money and buy something with stable value like real estate. Of course a house or some apartments will never generate an income of 4000 USD/week, but it generates an income that is adjustable to real inflation and you have still an asset that you can sell.
In last 30 years was inflation in western economies relatively low, because people took lot of credits which stabilized western currencies. However there is no guaranty that this stability of currency lasts forever. Gold parity for currency doesn't exist anymore.

[cunnilinguist]

What kind of question is this. The interest of $2M, when properly invested, can be $4000 per week easily or more. So you have the same money, but you have access to the $2M if you ever need it.

You can instantly buy, say, 10 properties, and rent them out, which will give you a stable income for the rest of your life. $4000, however, will be worth less and less as moeny loses value with inflation.

It you are talking about an amount that has a net present value of $4000 that's different of course. I might go for that. No need to invest, no risk, and it's safe. You may turn to gambling and lose $2M, but if you lose your $4000 you get more next week, right? Plus, after 10 years you will have received $2M, and you keep receiving more.

Well, the answer can depend on how old you are and how much of a businessman and/or risk-taker you are.

[Phoenix98]

4,000$ a week for life, not only is that guaranteed money you can live off of forever but the amount you'll receive will surpass two million dollars.

In just one year you'll make about 208,000$ dollars more then enough to live off of for a year. And you'll get that amount every year for life.

It's the safe and the smart choice especially considering the fact that you can safety put that into stuff like stocks without having to worry about never getting that money back if the market dipped and if the market spikes you can make a crap ton of money.

[Unit1]

Math!
a month has on average 4 weeks, so 4 weeks * $4000 = $16000
$16000 * 12 months = $192000 per year! That's already huge.

Now let's divide 2 million dollars in that number: 2000000/192000 = 10,41 years

The choice is an easy one. If you live 11 year and longer, the $4000/week is the one, that yields more money long term.
However a one time 2 million dollar payment is a great way to blow it away on a big home with pool, big ass speakers, a backyard and a SUV in your garage all at once and not pay rent for your life but only utility bills, food and hobbies.

Pick your poison.

At first I would have chosen $4K/week but since I need a home in Europe and I do not want to pay rent to a landlord, I'll definitely go for the 2 million and invest it into getting assets and that home with pool and backyard near a beach.

[Cynicaldreamer]

4k a week. I can easily live off that a month, but every week? I can invest it in stocks, put some in savings, and still live comfortably the rest of my life with a little fun money left over if budgeted properly!

2 million can last if you know how to budget and invest correctly. But getting a free 4k every week in my bank account sounds more appealing.

[Artesian]

Without doing the math, unless I plan to die in the next 5-10 years Option B is the financially prudent choice. Also, question doesn't say if I'm paying taxes. $208K/year can be finagled down to a 37% tax rate (fed & state), whereas the $2M up front will be closer to 46%. That needs to be factored into the solution

[Telekinetic-Potato]

Well, the 4,000 would take about 10 years to be equal to the 2 million so me being 23 the 4,000 sounds like a good deal ezcept you realize that out of 2million dollars, 4,000 only accounts for 0.2% meaning you're getting roughly a 10.5% increase per year.

But if I take my 2 million and invest it straight away. I might br able to get more money coming in.

[egarcia1360]

$4k per week might seem smart on the surface because it adds up to more than $2M in less than 10 years, but the devaluation of that fixed payment due to inflation combined with the investment opportunities that come with having a large sum right now actually make the $2 million a much better deal in the long run.

[slatyb]

$4000/week is better but it’s close. It depends on life expectancy and the expected investment income from the $2 million. The choices are convertible. If you had the income but needed cash you could borrow against the future income. If you had the cash you could purchase a lifetime but it wouldn’t pay $4k/week unless your life expectancy were less than about 15 years.

[Drumlin2001]

As much as the £2m would allow me to buy a house and everything I would need for son n maybe a future child, but its the equivalent of less than 10yrs worth of the £4k a week. I would hope to live 30-40 years. A steady income of over £200k a year would be better in the long run

[loveslongnails]

Not calculating taxes, if you took $2 million straight up and got 2.5% interest on it, you'd have $2.1 million in two years. It would take you 9 years to get the same amount at $4000 a week. So the real question is about taxes. If you lose a million right off the bat by taking it in a lump sum, and your tax rate is 28%, interest is 2.5% and remains the same, and inflation is 2%, it will take you 28 years to accumulate $2 million.

[AllThatSweetJazz]

The 4000 is safe. But I'd want to take the 2 million now because you can invest or build a business and start to rake in more than 4000/w.

After 10 years all the people who chose 4000 reach the 2mil total mark, but the people who chose 2mil at the start and knew what to do with it could be doing a lot better after 10 years.

[Torari]

2 million. Because if i invested 90% of it, after 5 years it would bring in a return on investment of more than $4000 per week, and thanks to compounding interest, that would only exponentially accelerate.

Of course, you could also invest the $4000 per week, but because of compounding interest, its better to invest 2 million today, than it is to invest 2 million over the next 10 years.

[Liam_Hayden]

$4K per week. My investments before the crisis were averaging about 11.6% per year. Even at half, by adding the $4K per week I'd be ahead of the $2M in about 17 years. I'd still be in my early 40's and the money would still be adding to the amount that was increasing fater than the $2M.

[Liam_Hayden]

And a downvote from someone who cannot multiply.

[Futureboy]

Effectively that's like having £48000 a year salary something most people can only dream of. If you have 1 million your likely to blow it on a house, holidays and fast cars. Plus it would only take a few weeks to get enough deposit money for a house.

[Flower7]

I would take the $4,000 a week because 2 million would be reached in less than 10 years, and my life might end up lasting longer than that. So I could end up having a lot more than 2 million in the long run.

[loveslongnails]

However, if you had a million dollars now, taxes already paid, your potential to more than double that in 10 years is very high.

[Flower7]

@loveslongnails That would still be less than what $4,000 a week would add up to. My expected lifespan is about 40-50 more years.

[loveslongnails]

That's true, if you weren't "allowed" to invest it. If your initial investment is $0 and you add $4k a week, that's $208,000 annually. If your rate of interest equals the rate of inflation, let's say 2%, you'll have $17,592,515.50 after 50 years. You'd only have $2,691,588.02 in 50 years if you started with a million and never added to it annually. So interesting question if you ARE able to invest it. Could you turn $1 million into more than almost $18 million, in 50 years? It would take you 5 years to get to that initial million. Your choice makes sense because after 5 years, you'll have a million to play with and 45 years to do it with.

[DizzyDesii]

Youd be dumb not to chose $4,000. I get you can die anyday but still its more worth it