Financial advisors agree with the young lady's choice on how to cash in her winnings
Canadian teenager Charlie Lagarde made headlines last week when she hit the jackpot with her first-ever scratch lottery ticket on her 18th birthday. When Loto Quebec offered her a choice between a million-dollar lump sum and getting a $1,000 per week tax-free for life, she went with the latter.
It was the right decision. As a report by BBC News noted, it would take Lagarde just over 19 years to amass $1m from a purely mathematical standpoint. If she lives into her 80s, she’ll collect more than $3m over her lifetime.
Rationing the winnings over time is also ideal from a behavioural perspective. “This removes all temptation to spend on things that feel like more of a priority at the age of 18 than they might later in life,” Sarah Coles of UK-based Hargreaves Lansdown told BBC News.
Many lottery winners would choose to get the single payment, particularly if it would give them an opportunity to take care of a mortgage, student debt, or other massive financial obligations — problems that Lagarde isn’t likely to have just yet. Others might consider taking the million-dollar payoff and investing it to get better returns.
But as Tom Selby, senior analyst at pensions firm AJ Bell noted, Lagarde has time on her side. Assuming an investment return of 5%, he determined that if she were to spend nothing and invest the weekly payments, as opposed to investing the $1m lump sum, she’d be better off by age 68.
Taking his calculations further, Selby found that by spending half of the $52,000 each year and investing the rest would let her reach $1m by age 39, and $12.5m by age 82. In comparison, investing the $1-m lump sum and withdrawing $26,000 each year — which would be taxed — would result in her being worse off by age 75; at age 82, she’d be marginally poorer with $12m.
Even after accounting for inflation, which would erode the value of Lagarde’s $1,000 weekly payment over time, she seems to come out ahead. After estimating an inflation rate of 3%, Coles determined that the weekly revenue would amount to $250 a week in real terms in 50 years.
“It would therefore take her until the age of 47 to hit $1m in real terms,” Coles said. “But even after taking inflation into account, her lifetime income from the win could be over $1.5m.”