The Economics of A Lottery Win

Running the Numbers on Winning Numbers

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A Billion with two Bs… 

After 40 draws came up dry, the largest lottery purse in US history has claimed a winner, and they’re somewhere in Los Angeles County.

Talk about a Hollywood ending. 

Two billion-dollar lottery wins in six months. It may have you thinking, “geez, should I get in on this?!” 

2 billion is such a big number that if you counted to 2 billion, saying one number every second, it would take over 63 years.

Here are some other numbers to consider:

The odds of winning this $2.04B were about 1 in 292.2 million. In other words, you had a better chance of getting struck by lightning, getting eaten by a Grizzly, AND playing in the NBA than winning the lottery.

Still, in Pennsylvania, retailers were selling 200 tickets a second over lunch this week.

How Winning Works.

So, let’s say you DO win the lottery. Or maybe you just did. Congratulations! I’m so glad I’m your best friend in the world. Do you need me to clean your room or live in your mansion or anything?

A few things to consider: you won’t actually receive the $2B, for reasons we’ll get into. Before we do, you have a decision to make. You can receive your money as a lump sum, or you can receive your money in 30 payments over 29 years.

Which. To. Choose?

Option A. The Lump Sum.

Opt for the “lump sum”, and that $2 billion drops down to $997.6 million before you’ve even had a chance to pick up the bullet-proof briefcase. Turns out you pay a penalty for taking it all in one haul

Next, you’ll be taxed on the lump sum federally and locally (although not, coincidentally, in California). 

The Powerball winnings are expected to take a 50% tax hit, leaving you with a final sum of $498.8 million. It’s nothing to sneeze at, but it’s also a long way from $2B. 

Option B. The Annuity. 

Your other option is to take 30 payments over 29 years. The Annuity Option. With this option you won’t get “penalized” with a hit off the top, and before taxes, you’ll actually receive the full $2.04 billion over 29 years. 

At the time of posting, the annual after tax amount for this option isn’t known. But whatever it is, Option B will leave you with a significantly larger sum than Option A’s lump sum leftovers.

So, perhaps this seems like a no-brainer — “take the bigger number!” But wait. What IS the bigger number? As a savvy, financially literate investor, you could take Option A’s $498.8 million lump sum, invest it in a diversified portfolio, and in 29 years of compounding at 6%, you’d add over $3.96B to that smaller lump sum. 

An extra $4B? Maybe compound interest is what people mean when they say less is more…