We've all been asked the question, "What would you do with $1 million?" Sounds rather quaint now, doesn't it?
As everyone in 42 states, plus the District of Columbia and the U.S. Virgin Islands knows (and probably everyone in the other eight loser states), Friday's Mega Millions drawing will be for an estimated $540 million. Likely a world record lottery payout.
That ain't chump change, even to the 1%.
The odds of winning are an appealing 1 in 176 million. Why appealing? Because, if you win, it will reinforce your outsized opinion of yourself. You literally are one in 176 million. To put the odds in terms of the world's population -- if all seven billion people each played one set of numbers, at these odds, only 39.78 of us would win the pot. Even counting that oddball 78/100 of a person (who is probably my weird neighbor down the block; he's missing a few chromosomes), each winner would pocket a bit more than $13,574,000.
That ain't chump change, except to the 1%.
Ok. You beat the odds. You win the whole $540 million pot and my everlasting spite. Your first decision is whether to take the annuity or the one lump sum. According to the official Mega Millions web site FAQ the annuity is paid out over 26 years at approximately $38,500 per million in the jackpot (before taxes -- oh, yes, we'll get to taxes shortly). That's $20, 790,000 each year. Again, before taxes. Option 2, the lump sum: that amount will be ... they don't know exactly. But it will be less than $540 million. Let's say it won't exceed $500 million. Because it's a nice round number, that's why. So, there's your choice. For me, 26 years puts me beyond my life expectancy (excuse me as I shudder at that knowledge). Since the next generation of my heirs never remembers my birthday, screw them and the chance they'll get to finish out my annuity. It's the lump sum option for me. Which brings a knock on the door from the IRS.
Taxes. If you live where there's no state income tax, good for you and bite me. Illinois raised its percentage last year, the bastards. Nonetheless, the Feds will be claiming the big transfer of your newly gotten gains. Two bits of info to remember: 1) taxes are historically low for the 1%, of which you're now a member (the Occupy protesters have been notified); 2) tax lawyers and CPAs will be lined up offering oral sex in exchange for letting them shelter your money (and bill you out the ass). If you take the annuity route, you're chancing that the tax rate will go up and loop holes will be closed during the next 26 years. Otherwise, you can take the hit now.
Turn to your 1040 Instructions Manual. For 2011, the top tax rate for those married filing jointly is $102,574.00 + 35% on the amount greater than $379,150.00. And, brother, did you exceed that amount. The formula is ($500,000,000 - $379,000) x 35% + $102,574 = your income tax before the aforementioned tax lawyers and CPAs stop guzzling champagne (which they're billing you for) and get to work. That tax hit? A cool $174,969,924.00. [your math may vary] Plus your state income tax.
The Feds leave you with a bit more than $325 million. That's still not chump change. But you're off the social calendar of the top .01%.
So the original question now becomes, "What would you do with $325 million?" Use it as seed money to build a world-dominating financial empire? Or maybe you become the next Dateline story about a lottery winner going bankrupt. Probably you'll be somewhere in between.
Me? I'm going to do a leveraged buyout of Mitt Romney. That schmuck only has an estimated worth of $250 million. It'll be easy to buy him. Then I'll take over his life and charge exorbitant managerial fees to run his personal and political lives. Naturally I'll fire his family, since they're nothing but a drain on profits. Afterwards I'll sell off parts of his political policies to the highest bidding lobbyists. It'll be huge profits for me, especially if I can completely sell Mitt off before the election. Huge profits.
After I cash in my Mitt investment -- my original $325 million? It'll look like chump change.
Update: Announced as of around 10:00 CDT this morning (Friday), the Mega Million jackpot now stands at $640 million. The lump sum payment is $462 million.