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Lotterule
(lemmy.world)
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this post was submitted on 30 Dec 2024
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The lump sum will grow to be worth more than the annuity over the same period if properly invested
Ah yes, the thing nobody is ever actually taught nor follows.
plenty of people do, they just don't have 400 million to do it with
like my brother used the cheapo student loans here in sweden to just chuck a bunch of money into low-risk index funds (i think that's the term) and he's gotten 2000 bucks from that for basically 0 effort.
now imagine doing that with millions of dollars
I don't fault him, but also that sounds probably illegal. That money is the state investing in education, expecting a return from a more educated populace. If you're just taking the money to invest it yourself, that's not helping their goal, and is probably breaking something you'd agreed to if I had to guess (or it probably should if it isn't).
i can see nothing about any limitations on what you can do with the loan at all, it's not investing in education as much as it's an incentive and aid to get people to study more, what you do with the money is wholly up to you. Should it be illegal to buy an e-bike so you don't need a car, and thus save tons of money?
the fact that you can invest the loans is part of the incentive to get you to study, if you start putting limitations on what you can use the money for (which i'm not sure is legal anyways, i don't even have any sort of limitations on what i spend my welfare money on, i could blow it on alcohol if i wished) then you start eroding part of why many people study in the first place.
In most countries though, loans are given by a bank for a specific purpose and not allowed to be used for other purposes. Now money is fungible though, so if you had enough money to not need a student loan, and you took the education loan anyway and then used it for education, and spent money you had anyway which you would have used for education but now you invest it, that’s all cool.
Edit - I realised I typed this very badly. What I meant was, say you had 10,000 BSD in your bank account, and took a student loan of 5,000 BSD, you now have 15,000 BSD. Now if you pay 5,000 BSD for college, whether it came from the original 10k or the loaned 5k, it doesn’t matter. And you could have paid the college from your original money and invested the 5k from the loaned money and it’s all the same since it’s from your fungible pool of 15k.
I guess that's a fair point. However, I do think there should be some limitations. There's limited money, and the governments job should be to spend it in ways that create the best outcomes (if it's a good government working for the people). If they're throwing it away in ways that aren't beneficial then there's an opportunity cost where it could be better spent on something else.
As for if it's legal, I have no idea on how your government works, but the government creates the laws, including the one providing the loans, so they could presumably create a law saying a certain portion must be spent on certain things (transportation, school materials, classes, etc.).
All kinds of low risk things go down occasionally. Think of the 2008 financial crash for example. On average, or over a long time, you are very likely to make gains. But that’s not nevessarily true for shorter periods like 10 years even if you invest in low risk assets.
Edit: I also invested some of my student loans in Finland. Or officially, my other income that was freed up due to the loan ¯_(ツ)_/¯
well he made the profit in like 2 years lol.
Also there's at least one bank here that specifically only has savings accounts, with pretty decent interest (like 2.7%) and free withdrawals at any time. And because it's sweden the state will protect any money you deposit under like $100k per person.
For the last year or so getting a 5% (1-3 yr) CD was not unheard of, so literally leaving it in a bank account is better than the annuity option by the above poster's math.
I don't think you quite understand what I mean. You can't extrapolate from the last 3 years. What you can extrapolate from is longer periods of time, where we occasionally see assets going generally down for some time. So you have maybe 90% chance of your stock portfolio going up in the next 5 or 10 years, and 10% chance of it going down (rough numbers but the point holds).
So you can end up in a situation where you lose money, but it's unlikely. If you are very risk averse, you would prefer a 0% increase over these odds.
If you win a large amount of money, you don't need to learn how to invest it. You now have the money to pay someone to do that for you. You just need to not be stupid enough to skip this.
But you do need to be smart enough to hire good trustworthy finical advisers. And the more people you need to hire for a task the greater the chance of hiring poorly.
People investing any amount of money with someone need to make sure they're using a fiduciary advisor, because they are supposed to act on your best interests with your money. Non-fiduciary advisors can funnel your money into vehicles that enrich them at your expense.
Good luck not hiring a scammer…
Or... you know... it gets fucking wasted and scammed out of peoples hands because they have no idea to handle big money.
This is probably the most likely outcome. It doesn't take much intelligence to just hire someone to handle your investments, but it also doesn't take much intelligence to recognize that gambling is profit-negative. Sure, someone gets lucky, but more money is lost than gained so the expected value is negative. People who can't realize this are more likely to be scammed, because they already were at least once.
Thats usually exactly where the scammers start scamming from what i have seen. With that kind of money, people get greedy very quickly.
But then how much utility can you get out of the lump sum early on with those calculations?
There has to be some break even point, if your burn rate is high enough the annuity is better.
For a smaller amount this would be a much more important question. However, 550 million dollars is such a large amount that the gain in utility up to 2 billion is questionable. You could buy a private jet and still have half a billion to invest. That half a billion nets you 25 million a year (with 5 % interest/roi) without ever shrinking.
The usual math goes something like
Annuity: $2B paid monthly over 30 years is $5.5M/month; $3.5M after taxes.
Lump sum: $1B, $670M after taxes. Invested in index fund at, say 8%, can be expected to earn $4.5M/month, $3.6M after more taxes, which are lower for capital gains & dividends.
There's more complicated maths, if you want to model taxes, future values, and variable market returns, but they all say pretty much the same thing. They have to: the annuity works because They put the lump sum into escrow, pay a trustee to manage it well enough to pay the annuity and pay the trustee's salary. That means the trustee will invest said lump sum (before taxes) in low-risk, low-return assets, take his vig, and pay out the annuity from what's left.
I didn't think about risk management on lump sum vs annuity from the management side, that changes things.
Much better to take the lump sum, and manage it as aggressively or conservatively as you want. Unless it's government insured, and the government will step in to continue paying you if the fiduciary goes tits up.
Wouldn’t you pay a lot more taxes on the lump sum and subsequent capital gains?
Not when invested properly. Using easy examples, if you win a million dollars and take it over 30 years, say you're taxed 20%, you get $800k. You choose to take a lump sum and they only give you 30% of the value, you get $300k. Investing that $300k at 5% over 30 years, you've got an additional $55k over what you would have gotten over the same time period. Now, the average market return rate is closer to 3-5% higher than that, so that 5% return is a conservative estimate of what you have after fees and pulling some out for yourself (3% is a recommendation I've heard), putting you well above what you'd get from the annuity.
Properly investing takes a lot of time and your big lump of money is not protected if the bank goes under. But yes, that is the best strategy.
Yeah for protection you invest it into US Treasuries or German Bunds and collect the interest. Not very likely that the US or German economy will collapse before any bank will go under. If the US economy is collapsing everyone is fucked anyway even the crypto bros, since there is a world war going on.