Unless you’ve been in a media blackout for the past few days, you’ve heard that the Powerball lottery has set a new all-time high for a jackpot, breaking the billion dollar mark for the first time. The jackpot for Wednesday’s drawing is estimated to be around $1.5 billion, which is a huge chunk of change.
It’s been hard for me to avoid it, actually. I know quite a few people who have purchased tickets, including people who would never normally play the lottery, and it’s been pretty hard to read a newspaper or a news website without hearing breathless talk about this lottery.
In all of the hubbub, a few things have really stood out to me as items worth thinking about regarding the lottery.
The Real Value Is in the Anticipation
Let’s look at the value proposition of buying a single $2 ticket for Wednesday’s Powerball drawing.
The odds of winning the grand prize, which is $1.5 billion or a share thereof, is 1 in 292,201,338.
The odds of winning $1 million is 1 in 11,688,053.52.
The odds of winning $50,000 is 1 in 913,129.18.
The odds of winning $100 via four matching numbers is 1 in 36,525.17.
The odds of winning $100 via three matching numbers and the Powerball is 1 in 14,494.11.
The odds of winning $7 via three matching numbers is 1 in 579.76.
The odds of winning $7 via two matching numbers and the Powerball is 1 in 701.33.
The odds of winning $4 via one matching number and the Powerball is 1 in 91.98.
The odds of winning $4 via simply matching the Powerball is 1 in 38.32.
Overall, the odds of winning any prize are 1 in 24.87. That’s not good odds. 24 out of 25 tickets will be absolutely worthless. In $50 worth of tickets, the most likely outcome is that 1 of them will be worth anything at all and that one is likely to be a $4 winner.
Obviously, buying a lottery ticket is a pretty terrible idea from a financial standpoint. It verges on throwing money away, at least in terms of the odds of having any sort of return on that money. The odds are incredibly strongly against you.
So why do people buy?
It’s all about dreams and anticipation. If you hold a lottery ticket in your hands, there is at least some chance, no matter how small, that you could win a large prize. Because of that, it affords people the opportunity to dream of what they might do if they did win as well as the anticipation of waiting to see what the numbers are when they are drawn.
I genuinely don’t have any sort of problem with that. People spend more than that on frivolous things all the time. The thing to remember is that you can get those same dreams and anticipation from a single $2 ticket as you can from $50 worth of tickets.
Of course, you’ll get the most value from such a ticket by purchasing it early in the cycle. If this lottery were to happen to roll over again, pushing the jackpot into the $2 billion range, the people who would buy a single ticket for the dreams and anticipation are best served by doing it first thing in the morning on the next day, giving them three days to dream with that ticket in their pocket.
Anything more than that basic purchase is simply a waste of resources that will end up costing you far more than it will ever bring you. Additional tickets don’t add more to the anticipation or improve your odds beyond changing the utterly microscopic to the slightly less microscopic, but they do begin do have a real impact on your finances.
So, if you must play the lottery, do so really early in the period between drawings and buy only a single ticket. Doing so maximizes the real value that you get from that ticket.
If You Win, Take the Annuity
Let’s say you were to actually win that $1.5 billion jackpot. You would be offered two choices: a lump sum payment of $930 million, or thirty payments of $50 million each over the next thirty years. The latter option is commonly called an annuity.
If you sit down and run the numbers on these options, you’ll discover that the annuity is going to earn you a roughly 2.843% guaranteed annual return on your money. That’s substantially better than most savings accounts, but not as good as you would get investing it in other things over a thirty year period – at least, according to the history of things like the stock market or real estate markets.
Here’s the problem, though: the vast majority of Americans aren’t actually very good with their money. I like to quote the fact that 76% of Americans live paycheck to paycheck (which would include an awful lot of families earning well into the six figures), but I do so because it illustrates a key point: people don’t manage their money very well.
“But I’ll have almost a billion dollars,” people might think. And that’s true, except every scammer and long lost relative in the world would be heading your way pretty directly upon hearing the news. If you add into that the evidence that most Americans aren’t very good at managing their own money, as described above, and you’re taking a pretty big risk in taking that lump sum payment. If you have the willpower to lock up most or all of that money after taxes in such a way that you can’t or won’t touch the balance, then it might be a good move, but remember that 76% of us can’t even keep our checkbook balanced.
Because of that, I would strongly encourage any large lottery winner to take the annuity option instead of the lump sum option. The annuity option ensures that you’ll spread out that money over a long period of time no matter what you choose, while having that giant lump sum all at once would make it easy to just burn through all of it much quicker than you think.
If I Win…
Honestly, I did not buy a ticket for this Powerball drawing. Why not, if I think it is reasonable to do so for the anticipation of a $2 ticket?
To put it simply, the thought of winning the jackpot does not fill me with positive feelings. Sure, my family would be financially independent at that point (and my children… and my grandchildren, most likely), but I mostly feel apprehension about winning that lottery, the media attention it would receive, and also how I would relate to family and friends. The people in my life are the most important thing to me, but I know that if I won that much money, those relationships would change and not for the better.
So, for me, the biggest value of the ticket – the dreams and anticipation – don’t really add up to much. So I didn’t buy a ticket.
But let’s say that I did, and let’s say that I won. What would happen next?
First of all, I would take the lump sum payment. I already know that I have the willpower not to spend money. We’ve been living on about half of our family income for years. Not only that, I don’t actually have that many big dreams that I want to fulfill, other than a nice home in the country. That, along with a few specific charitable donations, would be my only significant purchase.
Next, I would invest 98% of the money almost immediately. The lump sum payment would be $930 million. Next April, I’d owe a pretty hefty tax bill, but over the ensuing time, I’d invest virtually all of that money, paying the taxes only when they are due. Then, I’d tell the people who came at me asking for money that the money was already out of my hands.
I would eventually hire a financial advisor, but that advisor would be very carefully screened. I’d look at financial advisors who aid the extremely wealthy and help them to preserve their wealth. I actually feel as though I could easily manage my own wealth, but I do have concerns about tax issues.
Then, I would live off of part of the return on my investments. Let’s say that I kept $500 million after all taxes were paid, which seems roughly reasonable. I’d invest most of that in the stock market in a highly diversified way, so the value of it would go up over time, but I’d also earn dividends at a rate of about 2% per year. That’s about $10 million a year, which is far more than I can even conceive of spending. Likely, I’d pay the taxes on that, keep a fairly small portion of it to live on (maybe 20% of what’s left, but probably less than that), and roll the rest back into the investment. This would likely all be handled within a trust that would give us perhaps $1-2 million per year to live on.
Why not spend all of that money? First of all, I can’t even conceive of things I’d even want to spend my money on that would suck down more than a million per year. I have no interest in buying or owning or experiencing the things that the very wealthy have or experience. I don’t want a yacht. I don’t want a mansion. I might buy a second house somewhere, but that’s a maybe. I’d travel, but I don’t really have any interest in traveling exorbitantly. I’m just not wired for that stuff, I guess.
Final Thoughts
I don’t need to state again and again how lotteries are a bad value proposition. You don’t get a good return on your dollar when you buy a ticket. All you really get is a bit of wishful thinking and anticipation, which is honestly not a terrible way to spend $2, but multiple tickets don’t really help that value proposition.
Instead, keep that cash in your pocket. Use it to pay a little bit more on your next debt payment, or stick it in your Roth IRA. You’ll get more value out of it that way.
Good luck!
The post The “Billion Dollar Lottery” and You appeared first on The Simple Dollar.
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