Peachtree Financial Solutions

How It Works

The Time Value of Money. Why are future payments worth less than money today? This is due to the ‘Time Value of Money’, and explaining this concept can be difficult. In a nutshell, inflation and other economic factors cause a dollar today to be worth more than a dollar tomorrow.

Part of the money you are getting in the future is interest that hasn’t been earned yet. The Lottery Commission is simply paying you the interest on the money they invested when you won. The ‘amount’ of the prize (i.e. the sum of all the future payments) includes a great deal of interest that hasn’t been earned yet.

Lump sum options that some state lotteries now offer prove the point.

Many state lotteries now offer a lump sum option instead of the traditional 20 - 30 year annuity payout. However, when you elect to receive a lump sum you typically receive about one half of the advertised prize amount before taxes. After paying taxes, you end up with approximately 1/3 of the advertised prize amount.

The reason for this is simple. The Lottery Commission purchases an annuity or U.S. Treasury bonds to fund the future payments due to the winner.

By converting future payments into a lump sum, an individual can gain a potent weapon in fighting inflation.

Just look at what inflation has done:

1980 Average Prices:

  • College Tuition: $2,897.00 (National Center for Educational Statistics)
  • New House: $77,867.00 (Office of Federal Housing Enterprise Oversight)
  • New Car: $7,574.00 (Office Of Transportation Technologies)

Imagine how little that “huge” $100,000.00 payment due in January 2024 will be able to buy at that time.

A lump sum grows in value. The Rule of 72 states that an investment at a particular interest rate will double in a certain number of years. You can easily determine how quickly your investments will double simply by dividing 72 by the interest rate that you anticipate receiving in a given investment. For example, an investment that will yield 10% per year will double approximately every 7.2 years (72/10 = 7.2). A 12% yield would mean your investment doubles every 6 years. Below is a chart with the Rule of 72 applied to a $15,000 investment at various interest rates over the course of a number of years. This gives you some idea of how much a lump sum today might be worth in the future.

Future value of a $15,000.00 investment:

Interest Rate * Value after 10 Years Value after 15 Years Value after 20 Years
12% $49,505 $89,937 $163,388
14% $60,337 $121,012 $242,704
16% $73,514 $162,746 $360,288

* Assumes monthly compounding and excludes effects of taxation and other investment charges. This chart does not represent a predicted or guaranteed future rate of return and is for illustration purposes only.