Many competitions and reality shows out there flaunt a big prize. “The winner of Americas got talent will win a million dollars and headline show in Vegas!” is one example, and the currently running Monopoly game at McDonalds offers the same amount. Doesn’t that sound alluring? If so…take a closer look!
If you do take a closer look, you’d see that those terrific million dollars are actually given out in an annuity!
This means that the lucky winners will be getting only 50,000$ a year for 20 years, rather than the million dollars. A similar deal goes on with America’s Got Talent big million, but it’s spread out even more over 40 years, which means they will be paying the winner only about $2000 every month. For those contestants who were hoping on buying a nice house or a fancy car, you can forget about. Even if you do win the McDonalds grand prize (and your odds, as stated above, are one in 3 billion), the best you can hope for, after taxes, is enough for an average SUV. On AGT, the prize would barely cover the rent.
Why do they do this? Well, paying out in an annuity translates to a much lower sum of money. Money, you see, costs money. That’s why you pay interest to the bank if you want to borrow money, and the same trickery happens in almost all financial deals. If you have a large amount of money and deposit it in the bank, it earns you money the same way. For the production company that produces AGT, this is good because they don’t really have to come up with a million dollars. All they have to do is put aside a sum of money that will generate enough interest over 40 years to cover 1/40 of a million every year. The actual number differs, but generally speaking, it’s about a third. This means that the production company only has to set aside about 330,000$, and that’s it. In the case of McDonalds, which, according to investor Joshua Kennon, earns about 36% on their financial assets (like money they have in the bank) and so their cost for the annuity is actually only $137,000.
Is this fair? Well, it is legal, but it really stinks in my opinion. After all, America’s Got Talent pays out several millions a season to every one of their 4 judges, and they sure as sh** won’t be getting an annuity. They also openly ask the contestants “what will you do with the million”, letting these poor suckers fantasize about stuff that won’t happen even if they win.
To be clear…McDonalds earns a million dollars every 90 minutes or so. Both these companies, as well as most other big competition runners would barely feel a loss of one million dollars, but they are counting on the fact that they have millions of people lined up to compete, and that most of them don’t realize the annuity concept at all. Once these people do win, they really don’t have much choice other than shut up and take what they’re given. In fact, most of these people don’t even consider that the IRS would be taking a serious cut out of their winning anyway, so in the case of McDonalds, they’ll probably end up with about $3000 in their hand every month…barely enough for an apartment in most major cities. Keep all this in mind next time you get tempted by those promising competitions!