The odds of winning the Powerball jackpot are actually one out of 292 million.
(It’s actually a bit over 292 million, but why split hairs?
The one-in-292-million odds come from all the different combinations of the five white balls — in any order — out of a drum of 69 balls, multiplied by 26. For every five-ball combination, you then have 26 different associated yellow Powerballs.)
But remember that a ticket costs $2, not $1.
292-million-to-2 is 584 million to 1.
Let’s call it 585; remember we rounded the 292 down a bit.
Contemplate the risk versus the expected return. When the Powerball jackpot gets larger than 585 million, one could conceivably buy one of every possible numbered ticket, spending 585 million dollars, guaranteeing a win. The amount over 585 would be a guaranteed profit.
That’s an example of an “expected return” calculation to determine whether an investment was good or not. The old “risk versus return” contemplation.
That sort of “expected return” calculation is what investors use to decide how to invest their money. But even when the Powerball jackpot hit 1.5 billion, no investor would invest 585 million to get one of every number, because it’s still a bad investment.
The reason it’s still a bad investment is not taxes. All income — all investment profit return — does get taxed, eventually. (Smart investors find ways to put the taxes off, not eliminate them. At least not legally. Eventually the income is taxed, even if only after the investor dies. But this is another discussion.)
The reason that even an astronomical lottery jackpot is still a bad investment is not even because the lump sum payout is only 60% of the total you would get by taking 30 annual payments instead. Here’s why a lottery ticket is an absolutely lousy expected return on investment:
There can be more than one winner.
January 2016’s 1.5 billion had three winning tickets — less than 585 million each.
Yet, I admit, I still buy a ticket when it hits 585 million dollars. I’ll risk $2 on that.
The cost of half a beer for the possibility of winning the dream.
(Alright, I admit I buy at a quarter billion. I shouldn’t.)
Recognize this: if every single living American person’s name was in one big hat, you’d have better odds of having your name pulled from that hat. It really, truly, is much more likely that you will get hit by lightning — or even a meteorite. Just sayin. Instead of buying lottery tickets, you and your friend should buy each other a beer and have some smiles and laughs.
But wait! You dared to dream and you actually won!
Should you take the 30 annual payments or one big lump sum now?
Take the 30-payment annuity. Yep. Here’s why:
First, typically, most annuities end when the recipient dies. The annuity offered by Powerball doesn’t. If the winner dies, remaining payments go into the deceased winner’s estate and pass on to any heirs.
After that eliminated concern, this annuity option has a real tax savings benefit.
Powerball invests the entire cash value — before taxes are taken out — in various guaranteed securities that are backed by the U.S. government or agencies.
With the lump sum, taxes would actually be paid twice — on the initial lump sum and on any money made each year from investing it.
With the annuity, the winner wouldn’t be taxed on investment income while it grows because Powerball is actually the one investing the money, and it doesn’t pay income tax.
Plus now you can’t blow through it in five years like damn near every winner has.
(As an aside, if you die before it’s finished paying out, the I.R.S. will want to collect estate tax — death tax — right away on those payments’ future value. You likely won’t have enough cash on hand to satisfy the taxes due. But Powerball’s website proposes a simple solution to this: If you die, Powerball can convert your annuity into a cash lump sum, so your estate can pay it’s tax.)
Taxes aside, you’ll probably quibble with the pretax rate of return on the Powerball annuity. Effectively, it’s like investing in bonds that pay low interest. But it’s actually an acceptable rate for an ultra-safe investment — particularly when you factor in that there will be no fees to any financial managers.
But what if you just don’t want an ultrasafe investment? You want to make better returns on your investments. Well, let’s first consider the possibility that you might not be one of your generation’s great financial minds. After all, you did “invest” in a lottery ticket. The great thing about the annuity is, no matter what stupid choices you make this year, you’ll have a big check waiting for you next year.
Lastly, your Powerball win will bring a lot of long-lost friends and never-met relatives and advisors out of the woodwork. Being able to tell them that this year’s check is spent will help you conserve your fortune. You just got more luck than that of 292 million lives. Don’t press your luck. Take the annuity.
And buy me a beer.