The baseball NY Mets owed Bobby Bonilla $5.9 million in 1999. Rather than take the lump sum, Bonilla's agent negotiated for him to receive annual payments of $1.2 million for 25 years...starting on July 1, 2011. Question: If Bonilla was able to earn a return matching the stock market (using S&P 500 as a proxy), would he have been better off taking the lump sum? 

What makes this story even more interesting is that Bernie Madoff, the king of the Ponzi scheme, played a role in why the Mets were willing to agree to this arrangement. From ESPN:

At the time, Mets ownership was invested in a Bernie Madoff account that promised double-digit returns, and the Mets were poised to make a significant profit if the Madoff account delivered -- but that did not work out.

Back to the question...as of July 1, 2022..

• Option #1: Assuming Bonilla took the lump sum of $5.9 million on July 1, 1999, invested it in an S&P 500 ETF (SPY ticker), and reinvested dividends, he would have $24.8 million on July 1, 2022. Note that analysis excludes impact of taxes on dividends. 
• Option #2: Bonilla receives annual payments of $1.2 million starting on July 1, 2011 and immediately invests it in S&P 500 ETF (SPY ticker) and reinvested dividends, he would have $27.7 million. Note that analysis excludes impact of taxes on dividends.

Takeaways: 

• Option 2 will only get better as Bonilla will receive $1.2 million on each July 1st for the next 13 years. 
• Bonilla was fortunate and benefited from an extremely strong bull market since 2011, when his annual payments started. 
• Both options show the power of compounding;
  • The 20 years of compounding the market's returns in Option 1 generated more than a 4X return on the original investment. 
  • In option #2, as of 7/1/2022, Bonilla had received $14.3 million in annual payments and parlayed it into almost 2X the return through earning the market's return. 

Here's the spreadsheet with the calculations which could make for a fun student activity. Hat tip to Jessica for explaining Bobby Bonilla day to me. BTW, she's a huge Pirates fan. 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.