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The Lottery Jackpot’s The Largest In Recorded History, Should You ‘Invest’?

As the Powerball jackpot hits record-breaking $2 billion dollars, and we wait to see if there’s a winning ticket, does it make sense to play?

Your Chances Of Winning

The odds of matching the five numbers and the Powerball on any single drawing are 1 in 292 million. The lottery hasn’t seen a winner in three months so far, and the jackpot has built up accordingly.

Expected Value

The winnings are now large enough that for a ticket cost of $2 you have a shot at a total prize pool worth around $7. That’s calculated based on the chances of winning each prize level multiplied by its payout. It’s not normally that high, but now with an enormous jackpot, $2 billion spread over a tiny chance of winning makes up the bulk of that $7 value.

However, even that $7 may not be quite what it seems after the impact of taxes, inflation and a reduced lump-sum payout option.

Chance Of Loss

Buying something ‘worth’ $7 for $2 may seem to be a good deal, but there’s an important consideration. The chance of you failing to win the jackpot is very close to 100%. Specifically there’s a 99.9999997% chance you won’t win the jackpot in any given drawing.

If you could play the lottery enough, then of course, your chance of winning would rise, but the lottery doesn’t operate frequently enough for that, and, of course, these massive billion dollar jackpots are fairly rare.

Lots Of Tickets

If, theoretically, you played a different Powerball lottery every minute of every day for 30 years you would still only have a one in twenty chance of winning the big prize, and you’d have spent around thirty million dollars on Powerball tickets.

The reality is that, over your lifetime, your chances of winning the lottery are effectively zero. If you want to change that by buying a very large number of tickets, you’d most likely run out of cash a long time before you ever won.

Plus, remember the apparently favorable outcomes are a feature of the very large jackpot that won’t last forever. Typically the prize pool is worth less than the cost of the ticket.

Taxes And Cash Payments

Then even if you do win, I hate to tell you, but you won’t get the $2 billion dollars in full. The $2 billion is the nominal value of a series of annual payments spread over 30 years.

Federal Taxes

Most people don’t take that. They go for an immediate cash payment. That is typically less than half the announced prize. Then federal taxes are likely to be 37% on any winnings, since you’ll be in the highest tax bracket. State taxes could be a factor too, though maybe you’ll relocate to a more favorably taxed state with your new found wealth.

State Taxes

Some states such as California, Texas and Florida don’t put a tax on lottery winnings, but in many states you could pay around 3% in 10% in additional state taxes on your winnings, Oregon and D.C. have some of the highest taxes for lottery winnings.

That means that if you’re taking the lump-sum payment the cash you finally receive can be closer to a quarter of the announced prize amount if you take the lump sum, and then pay taxes on your winnings.

The Annuity

Unfortunately, the annuity option for the lottery jackpot is not quite as good as it sounds either. It’s a series of payments growing at 5% a year over 30 years. Adding up all those payments gets you to the $2 billion number.

This means the value is back-end loaded and not adjusted for either the time value of money or inflation. In 2052, when you receive a payment of around $120 million that’s not worth as much as $120 million of cash-in-hand today due to the impact of inflation and the greater value of having something today, compared to waiting decades for it.

Based on historic U.S. inflation rates, a dollar today will probably be worth around fifty cents or less in 2052 spending power. There’s also some risk you’re not around in 30 years, but lottery annuities can be passed on to your heirs.

Even before tax, the value of the annuity is less than it appears. If you were to discount those annuity payments at seven percent a year, a technique which is fairly standard practice in finance, then the value of the annuity is about one third of its face value and that’s pre-tax. Apparent winnings of a billion, once again, are closer to a few hundred million once these effects are considered.

Missing The Big Leagues

If you do win the lottery, you still won’t join the super-rich. For the world’s wealthiest billionaires, the change in their wealth in just a single day can amount to the after-tax value of winning the lottery. Of course, the money would still be life changing for you, but the world’s wealthiest currently have tens of billions in assets so you wouldn’t be joining the super-rich list.

Not As Good As It Seems

The lottery, even with a super-sized jackpot is not the attractive option that it seems. You may well be better served by investing your money in a diversified set of low-cost Exchanged Traded Funds rather than playing in the lottery.

In fact, winning the lottery can even be dangerous, lottery winners have ended up being killed or kidnapped. Many fail to manage their wealth effectively, and even end up bankrupt after a few years. Be careful what you wish for.

Helping Your Chances

However, one thing you can do to help your chances is to pick less popular lottery numbers. You can’t control if you win the jackpot, but if you do, sharing with other winning tickets will reduce your payout substantially.

Sharing is more likely if others have picked the same numbers as you. This means it can be helpful to pick lottery numbers that are less popular, picking numbers randomly may help. It could also be good to avoid numbers others a likely to pick such as more memorable or lower numbers.

Still, the big lottery jackpots aren’t quite as good as they seem, even if they offer slightly more attractive outcomes than usual.


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Probability of loss


Cash payment vs. annuity