Q:

What is the average percentage of loss when taking a lump sum pay out?

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Quick Answer

The average percentage of loss when taking a lump sum payout, such as cashing in an annuity, can be as high as 10 percent, according to Bankrate. Recipients incur liability for federal taxes and penalties if they sell their annuities before reaching 59 1/2 years old, as of 2015.

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Full Answer

In situations such as a $500 million lottery payout, the better choice depends on the existing interest rate, reports ABC News. Before taxes, the lump sum payment is about $359.4 million, and the annuity option payment is about $19,250,000 annually for 26 years. Lottery administrators purchase zero-coupon bonds to fund annuities, and the lump sum equals the present value of the bond. When the interest rate ranges between 3 and 5 percent, the value of the lump sum drops to about 50 percent of the lottery value. However, as the interest rate approaches zero, the lump sum becomes more valuable.

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