Ohtani, Mega Millions, and the attraction of deferred income
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For most of us, wealth is a backup for the risk of losing our income. For the extremely rich, however, guaranteed future income can be a backup for the risk of losing their wealth.
Why it matters: Whether you're a lottery winner or a baseball superstar, sometimes the person you can least trust with your money is yourself.
The big picture: Future income is money that can't be stolen or misappropriated, and while it's possible to recklessly splurge it, it's difficult enough to make that outcome less likely.
Driving the news (1): 29-year-old Shohei Ohtani is already a wealthy man, earning a reported $45 million per year from endorsements on top of the $30 million he received in return for a year's work at the Los Angeles Angels. As a result, his liquidity needs are small.
Driving the news (2): There were two jackpot winners in the Mega Millions lottery drawing on Dec. 8, and both winning tickets, curiously enough, were bought at the exact same Chevron station in Encino, California.
- It's therefore extremely likely that the same person bought both tickets.
- Why would it make sense to buy two identical tickets, thereby splitting any potential jackpot winnings into two halves? One possibility is that the bettor wanted to take the cash option with one ticket, while taking the annuity with the other.
By the numbers: Ohtani's new contract will pay him $2 million per year for the next 10 years, and then $68 million per year for the following 10 years, when some other superstar will be receiving the biggest endorsement deals.
- Someone splitting the Mega Millions jackpot in half would become instantly wealthy with a $97.5 million pre-tax windfall, and would then receive an enviable annual income starting at $3.1 million next year and rising to $12.2 million in 2052.
Be smart: In both cases, investment gains over the next decade or more are effectively accruing on money not yet received or taxed as income. As the NYT's Josh Barro pointed out in 2016, the tax benefit alone is a big reason for lottery winners (and, mutatis mutandis, baseball stars) to defer their income.
Between the lines: The skills needed to win the lottery or hit a home run are not generally associated with being able to identify capable and trustworthy investment advisers. (Picking a well-known multinational financial services company doesn't always work.)
- If you know that you don't have that skill, it's a good idea to hedge your bets a little and leave a substantial future income somewhere it can't be touched.
The bottom line: Good things come to those who wait.
