The Deception of a Billion Dollar Jackpot
I get it. It sucks you in. Dreaming of all the ways you would spend a sudden windfall. The lottery is this amazing chance to live on easy street for the millions that play it every week. It’s literally a ticket to a better life. Where else but the Powerball lottery can you invest $2 and turn it into $1.3 billion dollars overnight?
When you come forward, your name is public in most states. I hope you enjoy being a very popular third cousin once removed to everyone and their brother. And hey, if you do win, can I borrow some money because I’ve got a really great business idea and I’m willing to let you in as a partner on the ground floor? I’ll pay you back, I promise.
Let’s visit Jack Whittaker to see how the $315 million he won in 2002 changed his life. Spoiler alert: it wasn’t for the better. After winning an absurd amount of money, poor Jack was robbed a dozen times, got divorced, and, at 68, is currently back at work running two businesses that “aren’t doing very good”. It might be because he spends $600 per week trying to win the lottery again. Because it worked out so well the first time!
Playing the lottery is dangerous, even deadly. And not just because you’ll get jumped by a gang of ruffians like Poor Jack. Your odds of dying while driving to the gas station are higher than winning the lottery.
Let me drop some Math on you. The odds of winning the Powerball jackpot are 1 in 292 million. Given the national average fatality rate of 1 death per 100 million miles driven, a four mile round trip to the gas station equates to a 1 in 25 million risk of dying in an auto accident. For a freaking lottery ticket. The odds are stacked against you. You are 12 times more likely to die in a car crash while getting the ticket as you are to pick all six Powerball numbers.
Skip the lottery, save $2, save your life.
Even if we get past all the objections to buying a ticket, I ask “what’s different now?” Is $1.3 billion materially different from $130 million or $13 billion? Any of those jackpots would put virtually anyone into an entirely different category of wealth compared to where they are today. Why do we chase a billion so much harder than a measly hundred million? You would be fabulously filthy rich either way, so why try so hard for the billion?
Maybe it’s because a mere $100 million isn’t such a great jackpot after all, and it takes a billion dollar jackpot to entice us all off our couches and into our (deadly) cars to buy these $2 luck rockets. I’m talking about the haircut from taking a lump sum and the huge tax bill.
You’ll lose 38% of the pot by taking a lump sum. Then lose another 40-50% of what’s left when Uncle Sam realizes he, too, has won the lottery. You’re going straight to the top of the 39.6% federal tax bracket and depending on your state and local taxes, you could face another 10%+ tax burden. What you are left with is between 31% and 37% of the “jackpot”. For the current $1.3 billion jackpot, that’s “only” four or five hundred million dollars. A $100 million jackpot would only leave you with $31 to $37 million.
$31 million is a lot of money, but it’s not going to get you to Filthy Richville. You couldn’t afford to buy and maintain a private jet with such a small pittance. You’ll be stuck in first class sipping expensive champagne with all the other decamillionaires. On a (non-private) public jet. With Poor Jack Whittaker giving you the stink eye from his middle seat in coach while he contemptuously sips his room temperature can of ginger ale.
Of course, you might not even get $31 million because of the pari-mutuel nature of the lottery. In pari-mutuel betting, all jackpot winners share the pot. If anyone else picks “your” lucky numbers, get ready to split the pot with them. Is $15.1 or $10.3 million still a “jackpot”? You might be back in coach sharing that flat ginger ale with Poor Jack.
Between taxes, discounting for taking a lump sum, and the nature of the pari-mutuel bet, the $1.3 billion prize won’t be anywhere near $1.3 billion.
Setting aside the financials for a moment, just consider the sinking feeling you get when you realize you’re a loser. It can’t be healthy to stare at a fist full of wadded up lottery tickets covered in your tears. That megayacht with a helipad on top isn’t going to happen. Go ahead and fire the imaginary butlers you’ll never be able to afford.
Let’s face the facts. You are going to lose the lottery. You have a 291,999,999 out of 292,000,000 chance that your $2 ticket isn’t going to win you a billion dollars. Them are long odds. And even if you win, you will still lose (need I mention the parable of Poor Jack again?).
Are there alternatives to losing the lottery?
Fortunately, there are. One alternative is to light $2 on fire (without burning down your house) and at least enjoy some light and warmth from the fleeting flame. And for only $2, you can tell your friends how you literally watched money burn instead of wasting it on a lottery ticket. Instead of growing old and lamenting how you wasted $2 back in 2016 not winning a billion dollars, you can regale the youth with an epic tale of burning $2 just because you could.
But perhaps there’s another way to win the lottery of life. Like saving the lotto ticket money and investing it responsibly. Want to win $90,000? Starting at age 18, forgo the twice weekly $2 tickets all year. Keep doing that until you’re drawing Social Security at age 68 and all those $2 tickets will grow to $90,000 at a 7% rate of return. Why play the lottery when you can guarantee a $90,000 jackpot just by buying an index fund and not wasting money on lottery tickets?
P.S.: The Powerball folks put out a pretty funny FAQ. Check it out if you’re bored and/or tempted to waste money on lottery tickets.
What’s the appropriate amount of money to blow on lottery tickets? $0, because, well, math. $2 for entertainment value just to say you played? $20 so you can boost your odds to 1 in 29.2 million? If it’s higher than $20 just say $20 so I can feel better, okay?