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It’s in the news, and since I don’t know much about lotteries, I figured I’d look into this one.
I’ve never purchased a ticket and expect I never will. It’s not just the nearly impossible odds (1 in 292,201,338 in this case); I consider it a government-sponsored blood sport. In addition to being a tax on the poor and ignorant, the likelihood of an improvement in the lives of winners turns out to be about as probable as winning the lottery itself.
Harmless entertainment for some? Sure, but I still don’t like it.
What I do like is learning stuff, and this was an interesting fishing expedition.
The winning ticket for a $1.817 billion Powerball jackpot was announced two days ago in a Christmas Eve drawing. The ticket was purchased in Cabot, Arkansas, at a Murphy USA gas station located in a Walmart plaza. The date of purchase and the identity of the winner remain undisclosed. Tickets can be purchased anytime following a concluded drawing.
You get two options after winning: a lump sum (with a mere $1 billion scrubbed off the payout) or a 30-year annuity for the full amount that starts low at “only” $27.3 million and ramps up 5% annually. Unlike other annuities, you receive all 30 payments regardless of mortality, and you can leave the remaining payments to heirs, etc.
Those of you who have advised clients on pensions and the like won’t be shocked to learn that most lottery winners take the lump sum.
Taxes. Taxes. This is ordinary income! The house wins every lottery. They even gave the gas station owner $50,000 for selling the ticket.
OK, I’ll shut up and get to comparing the lump sum to the annuity. I got the after-tax amounts from Grok AI.
The implied rate of return you’d get by opting for the annuity over the lump sum is 4.9%. You may very well be able to beat that with equity index funds, especially over 30 years, but you eliminate almost all the hassle and risk by going with the annuity. Still, most winners take the lump sum—the house wins again!
Lump Sum vs. Annuity Table IRR
Annuity Graph with Lottery Participant Stats
For the record – Today’s quote at the top of the HumbleDollar page is “Buying lottery tickets is financially foolish. So why are we so surprised when winners fritter away their newfound wealth?” I’m a genius!
A little off topic, but one of us must surely have answers… should the winner after claiming elect to give the money away, would that result in gift taxes later to their estate? Alternatively, could the winner, prior to claiming, gift the entire ticket to charity? What would be the tax situation then?
I rambled on in a comment below explaining why I thought a prize this large would actually be a curse. Your idea of gifting the entire win to charity actually sounds pretty good!
I’ve never understood the “billion-dollar-jackpot-or-bust” mentality. At what point did $50 million stop being enough? Is the extra $950 million just for the headache of buying a private island big enough to have its own zip code?
Jesse Cramer, an occasional HD contributor and owner of the Best Interest blog, shared a similar analysis on Christmas Eve regarding Brenda Aubin-Vega. At just 20 years old, she famously opted for $1,000 a week for life rather than a $1 million lump sum—a decision Jesse defended by looking at the long-term math. https://bestinterest.blog/in-defense-of-brendas-lottery-decision/?utm_source=convertkit&utm_medium=email&utm_campaign=Lottery+Choices+and+Retirement+Planning+%F0%9F%8E%B2+-+20165488&sh_kit=1c5e3354f7c7f0fd5fe898a3f88681ec086442339ec208aa4eb20b3823d04244