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.
- 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.