I was browsing Twitter a few days ago, when I saw an interesting tweet by Money Tree Man. The gist of the tweet was “Let’s say you won the lottery, and you could choose your prize. You could choose $4,000 per week for life, or $2 million right now. What would you choose?” Looking at the numbers, I saw the obvious answer: take the $2 million now. Surprisingly (to me at least), pretty much everyone wanted the $4,000 per week. So which one of these is better?
$4,000 a week for life, or $2 Million now?
So, here’s the tweet that I mentioned before. Apparently it’s already caused WW3. But let’s cut through the tweet, make a few assumptions, and see where each scenario gets us. I promise, we won’t cause WW3 🙂
I will say that regardless of which one you choose, you’ll be very well off. $4,000 a week is $208,000 per year, enough to live a lavish lifestyle. $2 million is a lot of money, you can pay off your debts, buy a very nice house, and still live off $40,000 per year. And those scenarios don’t even take investing into account (which we will do below).
This picture almost just caused WW3 on my friend’s timeline… any of you want to jump in? pic.twitter.com/KWQIwjucnN
— Money Tree Man (@MoneyTreeMan) October 10, 2017
Before we begin, let’s make a few assumptions. For this exercise, we will ignore taxes. Why? Taking taxes into account makes everything more complicated. In fact, if we took taxes into account, choosing between $4,000 a week or $2 million now would result in at least 8 distinct scenarios, and each scenario would have an optimal and sub-optimal decision associated with it, so we’re really go over 16 scenarios.
The next thing is we will assume people will either spend 50% and spend 50% of the money, or save the entire thing. Going into other scenarios makes things very complicated. And I run a Financial Idependence Retire Early (FIRE) blog, so this fits in with my goals.
Finally, we’ll assume that we’re currently 25, and will live 50 more years until 75. This is really arbitrary, but it sets boundaries that we’ll use to evaluate what we should actually do. We’ll go through each of the 2 spending / saving scenarios, and then subdivide into which prize we took to evaluate the decision.
Save 100% of the Money
This scenario is super easy, and you might know the decision already. In this scenario, we will save all of our prize money, and see where it takes us. When I say that we’re “saving 100% of the money,” I really mean that we will invest the money in a stock portfolio that returns 7% post-inflation every year (on average).
Invest $4,000 per week
If we invest $4,000 per week for the next 50 years, how much would it be worth? You would have invested a total of $10,400,000. However, since you invested it, we need to account for the growth. We can do this easily. The portfolio ends up with the value of $61,165,277, after taking inflation into account.
This is a ton of money, we’ve essentially multiplied all of our contribution by 6x.
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Invest $2 Million right now
If we take that $2,000,000 prize and invest it right now, something interesting happens. Our portfolio does very well at first, and continues to do well in absolute terms. However, how does it stack up against investing $4,000 per week?
After 50 years, your portfolio will be worth $58,941,050.13. That’s a ton of money, and you only had to invest $2 million to get there. Our portfolio balance grew by a whopping 30x!
Initially, investing $2 million right now yields a much larger portfolio than $4,000 per week. However, by year 26, the portfolio balances switch, and the portfolio created with $4,000 per week starts to climb significantly. The initial $2 million deposit just can’t keep up with investing an extra $200,000 per year.
Note that in the first scenario, we invested $10 million and ended up with about $60 million for a total gain of 6x. However, in the second scenario, we only invested $2 million and ended up with about $60 million, for a 30x total gain. We were much more efficient in the second scenario.
Spend 50%, Invest 50%
In this second group of scenarios, we will spend half of the money, and invest the other half. This is probably more realistic. You’ve got bills to pay. You might want to buy a house, put a child through school, etc. In any event, let’s see what happens.
Spend $2,000 per week, Invest $2,000 per week
If you happen to be mathematically inclined, you know exactly what I’m about to say. If you choose this strategy, you get to live a rather luxurious lifestyle by spending $8,000 per month, in addition to investing $8,000 per month. At the end of 50 years, your portfolio ends up at $30,582,639. You’ll have also spent $5.2 million on yourself.
Spent $1,000,000, invest $1,000,000
Again, if you happen to be mathematically inclined, you already know the answer to this. You’ll immediately get to spend $1,000,000, and then invest the other $1,000,000. After 50 years, your portfolio will be worth $29.457,025. Unfortunately, you’ll have only spent $1,000,000.
So this scenario is a bit different. In both instances, you end up with about $30 million after 50 years. This is a ton of money. However, the amount of money you get to spend significantly diverges. We can see that $1 million lump sum investment starts off with an advantage, but around year 25, the recurring $2,000 weekly investment takes the lead.
If you take the $4,000 per week and spend $2,000 on yourself, you’ll end up spending $5.2 million plus you’ll have that $30 million investment portfolio. If you do the second strategy, you’ll end up with the same portfolio, but only spend $1 million.
So What Would You Do?
Do you take all the money now, or weekly paychecks? The answer isn’t super cut and dry, but we have some good advice. If your goal is to invest everything, just take the $2 million now. Your portfolio will have a significant advantage during the first 25 year of growth, and it gives you a lot more time to enjoy it. Remember, with the 4% rule, you can realistically spend $80,000 per year for decades. You could even wait 10 years and spend closer to $160,000 per year after your money have grown.
However, if you want to focus on spending money, take the $4,000 per week right now. Any of us can live on $2,000 per week, and just save the rest. Your portfolio will be the same as if you lump sum invested, but you’ll have spent $5.2 million over your investment horizon — roughly $100,000 per year!
If I ever win this awesome lottery, I know what I’m doing 🙂