Feeling Lucky? You're better off if you're playing the lottery. No matter what game you play, you have pretty long odds. For example, the odds of winning the jackpot in a Powerball draw are 1 in 292.2 million.1 To look at that, you have:
• 1 in 1,222,000 chance of being killed or injured by lightning in a given year
• 1 in 57,825 chance of dying from a wasp, wasp or wasp sting in your lifetime
• 1 in 35,074 chance of dying in a cataclysmic storm. Most people would agree that the chances of them experiencing any of these misfortunes are pretty small.
KEY POINTS TO REMEMBER
• Your chances of winning the lottery are very low.
• Chances of winning the lottery do not increase with regular play.
• Lottery jackpots are advertised as the sum of money received by winners over decades; the alternative one-time payments are much smaller.
• Prizes account for 50%-60% of lottery revenue, making lottery tickets a huge investment
• Lottery operators have reduced the odds of winning jackpots over time to ensure they get bigger after certain draws without a big winner. • Look at it differently. Let's say you go to the biggest stadium in the world, which takes place in North Korea. Imagine the stadium is filled to capacity and everyone inside is participating in a lottery with only one winner. In this case, your odds of winning will be 1 in 150,000.
Were you sitting on the edge of your seat in that stadium when they announced the winner? To equalize the odds of winning the Powerball jackpot, you'll need to fill that stadium to capacity 1,947 more times and gather all of those together and have the same draw with just one winner. win.
Still not convinced that a life-changing score is a long shot? If they offered a new home to just one person in the six most populous US states, the odds of winning would be more than double that of the Powerball top prize.
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Lottery Games Play
The odds of winning any Powerball, starting at just $4, with a single ticket are 1 in 24.9. One thing the lottery site doesn't mention is that if you win the Powerball, its odds of a $4 minimum prize are excellent, with more than 9 out of 10. (If you want to test this calculation, start with a total of 292,201,338 possible combinations of Powerball numbers. Using the odds provided by the lottery, there are 11,746,494 possible winning combinations. possible, where 7,623,532 corresponds to the Powerball but none of the five white balls and 3,176,229 matches the Powerball and one of the white balls, all paying $4. is a total of 10,799,761 possible winning combinations for the minimum prize. 11,746,494 total winning combinations and you have a 91.9% chance of winning the ticket that won't even pay out $5.)
The odds of winning something are lower, and the odds of claiming at least part of the Powerball jackpot are significantly better before the Multistate Lottery Association, which runs the game on behalf of the 38 states and territories of the United States, changed the rules in 2015, increasing the number of white balls from 59 to 69 while reducing the number of Powerballs from 35 to 26.
“Powerball has been improved seven more times in its 23-year history so the game can continue to engage players by providing the big jackpots players want, and these new changes will do just that. there,” said the Texas executive. Lottery foretells changes.
Not to be outdone, Mega Millions, a rival lottery game run by a consortium of 12 US states, changed its rules for the third time in 21 years in 2017 to make the jackpot harder. .
The big jackpots drive lottery sales, especially because they benefit from advertising-free games on news and newsletter sites. And the way to make sure they hit the seemingly deserving amounts more often is to make it harder to win the top prize. This makes it more likely to be carried over to the next drawing, increasing stakes and public interest.
Independent Probability
Of course, someone has to win the jackpot. But don't let that certainty cloud your judgment. The rules of probability state that you don't increase your lottery chances by playing more often or by betting larger amounts on each prize draw. Every lottery ticket has the same chance of winning, no matter how much you buy. Each ticket has an independent probability that is not affected by the frequency of play or the number of other tickets you have purchased for the same draw.
Buying more tickets definitely increases your chances of getting any prize, even if it's extremely likely to end up lower than you spent on the ticket. Spending $1,000 on a Mega Millions ticket has a nearly 50% chance of winning $64 or less, a nearly 90% chance that the prizes won won't exceed $92, and a 99% chance they will never. over $554.
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As the jackpots continue and grow, those who purchased tickets for the most recent draw can hope to reclaim some of the money that unlucky players spent on previous draws. This may initially improve the expected return from a ticket, but because the jackpot is higher and the associated advertising attracts other players, your chances of having to share a jackpot increase if hitting a jackpot can reduce the expected return below much smaller jackpots.
Remember that the lottery game prize is only 50%-60% of the ticket amount.
Who plays the lottery?
The odds of winning the lottery are extremely low, but that doesn't stop everyone from playing. American adults spend an average of about $310 per person per year on lottery tickets.
When the state lottery was introduced in Texas, the number of adults playing increased by 40%. Usually, a small minority of high rollers provide the majority of lottery revenue. A study in Minnesota found that 20% of lottery players accounted for 71% of lottery revenue, while in Pennsylvania, 29% of players accounted for 79% of lottery revenue.
So what? Lottery is just one of those fun things we do, a chance to fantasize about winning a fortune for a few dollars, right? For some, that's true. For others, often those with the least amount of money to spend, playing for these jackpots can be a real budget drain. Many studies have shown that low-income people make up a disproportionate share of lottery players. No wonder critics say the lottery game is a bogus tax on those who can afford it the least.
Lottery retailers earn a commission from the tickets they sell and also cash out when they sell a winning ticket, usually in the form of a reward or bonus.
Play with investment
A curious title appeared on the homepage of the Mega Millions lottery game in 2011. “Save for retirement,” he says. Anti-gambling groups wept over this apparent attempt to turn the lottery into a retirement plan; Lottery officials say the promotional campaign encourages players to dream about how they will use their winnings without offering a financial strategy.
Is there a better, more profitable use of the money spent on the lottery? Let's look at the numbers. Spending $5 a week on lottery tickets is $260 a year. Over 20 years (a typical long-term investment period for stocks and bonds), the total amount spent on the lottery will be $5,200. Putting $260 a year in stocks (and assuming an annual return of about 7 sed based on historical stock performance) will get you $11,015 in 20 years. But if you just spend money on lottery tickets, you will be left with only your (possibly insignificant) prizes.
Of course, the stock market is never a certainty. Stocks can fall in price as well as increase in price. So let's try a more conservative estimate. Consider someone who contributed $250 a year to an Individual Retirement Account (IRA) instead of spending that money on lottery tickets. After 30 years, and assuming a moderate average annual return of 4%, the account would be worth $15,392; After 40 years, that number will grow to more than $25,000. And that's before you consider the tax savings of tax-deductible IRA contributions.
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One-time salary or annuity?
Let's say that, despite the bad odds, you still win the lottery and win big - 7 big numbers. You will be faced with many decisions, and the first is how to get the money. Most lotteries give these winners the choice between a one-time and one-year payment. The lump sum is a single payment for the winning prize, after taxes, while the annuity splits the payments evenly over 20 or 30 years. Unlike some annuities that are only paid until the owner's death, for a lottery jackpot is a certain annuity:
payments continue for a defined number of years, and you can leave them to your heirs according to your will. Which one should you use?
Only eleven states allow winners to remain anonymous. Others may request disclosure of the winner's name and hometown. Because lottery tickets are purchased anonymously, some jackpot winners have placed their winning tickets in blind trust to protect their privacy. In case of one-time payment
Most lottery winners choose to make a one-time payment. They want all the money at once. Here are the main advantages of the package:
Full access to full pricing, after tax. Receiving a lump sum would certainly make sense for winners without heirs or hoping to live long enough to collect annuity payments.
Tax benefits:
Lottery jackpots are advertised as the sum of cumulative annuity payments that a single winner would receive over decades; instant one-time payments offered as an alternative are significantly lower. For example, the one-time payout for the $1.025 billion Mega Millions jackpot in July 2022 is $602.5 million.
You may be in a better tax position if you receive the proceeds as an annuity rather than in advance. Why? Lottery winnings are subject to income tax (federal and state, with the exception of some states that do not tax the winnings) for the year you receive the money. Let's say you win a $10 million prize. If you choose the one-time payment option, the entire amount is subject to income tax for that year. However, if you choose the annuity option, the payments will be spread out over several decades, as will the resulting tax bill.
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Other benefits of annuity
But perhaps the main argument for the more invisible annuity: protect yourself from yourself. A seven-figure windfall is a life-changing event, and not always for the best. Despite the often-told stories of lottery winners squandering their fortunes, most became richer and no less happy.
However, a big gambling bargain causes some people to lose perspective and others may face pressure to share it with family and friends along with questionable investment arguments.
An annuity minimizes these risks. After all, you can't give, waste, or mismanage what you don't have. Using money over time gives you many opportunities to invest it wisely. Even if things don't go well the first year, you'll be more likely to learn from your mistakes, make up for your losses, and run your business better.
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Estate Planning for Lottery Winners
Taxes are usually withheld from lottery distributions at the time they are paid. If the winner chooses once, it can often be inherited tax-free as estates are rarely taxed. If the payments are still from an annuity, tax will be deducted.
As with other inheritances, estate taxes may be payable if the value of the estate exceeds the exclusion limit of $12.06 million in 2022. Because lottery winnings push many people into the category of fish. wealthy individuals, inheritance tax can be a factor. In some states, Powerball will convert the annuity into one-time payments upon the winner's death to help manage any tax liabilities incurred.
The need
Many people see buying lottery tickets as a low-risk investment. Where can you “invest” $1 or $2 for a chance to win hundreds of millions of dollars? The risk reward ratio is certainly attractive, although the win rate is very low. But keep in mind that lottery players as a group contribute billions to government revenue that they could save for retirement or college tuition instead.
Even buying a small lottery ticket or two can add up to thousands of lost savings in the long run, if they become a habit.
In the unlikely event that you win the lottery, you'll want to work with your financial advisor, tax attorney or accountant to determine if a lump sum payment or an annuity is best for you. .
But if you are really interested in maximizing your wealth, the only winning move is to not gamble.