Adjust Text Size

Are You Playing the Mega-Millions Lottery?

Written by Nickel - 18 Comments

In case you haven’t heard, the Mega-Millions jackpot has topped $540M. Yes, you could win just over a half billion dollars (before taxes of course) for the low, low price of one dollar. So… Are you going to buy a ticket?

If you’re not interested in paying for the privilege of playing the lottery, you can check out this lottery simulator from GetRichSlowly, instead. But if you do decide to buy a ticket and play along…

Be aware that your odds of winning are 1 in 176 million. Also, if you do win, you’ll have to choose between an annuity worth the full amount or a lump sum payment. Decisions, decisions.

According to an ABC news report, given the current interest rate landscape, a $500M jackpot win would equate to a lump sum payment of around $359M. Conversely, if you annuitized, you would get $19.25M/year for the next 26 years — with payments going to a designated beneficiary in the even that you die.

Why the connection with interest rates? Because the good folks behind the lottery will by a zero coupon bond to cover the annuity payments. The lump sum payment is equal to the size of the required bond and with low interest rates, that bond needs to be larger. In a high rate environment, the lump sum would be lower.

While musing with my kids about what they’d do if they won the lottery, our 14 year old said “I know what you’d do, dad. You’d buy mutual funds.” Does he know me, or what?

Actually, with that kind of cash laying around, I wouldn’t have much need to take risk, so I’d probably invest it quite conservatively.

Our twelve year old chimed in saying that he’d build a full court basketball court in the backyard. When asked why he wouldn’t just buy a huge house with an indoor court, he said that he likes our house and doesn’t want to move. Good kid.

What about you? If you won the Mega-Millions jackpot, what would you do?

Full disclosure: My wife bought six tickets last night — one for each of us — as a bit of fun. Yes, we’re fully aware that the lottery is little more than a tax on people who are bad at math, but that doesn’t mean we can’t have a bit of fun with it.

Disclaimer: Discover is a paid advertiser of this site.
Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.

Published on March 30th, 2012
Modified on April 1st, 2012 - 18 Comments
Filed under: Miscellany

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

18 Responses to “Are You Playing the Mega-Millions Lottery?”

1
DanR Says:
March 30th, 2012 at 12:11 pm
“Yes, we’re fully aware that the lottery is little more than a tax on people who are bad at math”

Not true in all cases. When the payout of the lottery is higher than the odds of winning (as it is in this case), the expected value for a lottery ticket is higher than the cost.

So, for example, we know that the odds of winning are 1 in 176 million. If the net jackpot was $176 million, your investment of a dollar would yield a 1 in 176 million chance at returning $176 million. The value of such a ticket to a risk neutral person is one dollar. Since the expected jackpot is higher than $176 million dollars, the expected value of a lottery ticket is higher than a dollar.
2
Nickel Says:
March 30th, 2012 at 1:24 pm
Danr: Correct. I’ve always joked that I only play the lottery when the payout is better than the odds of winning. But even that is a bit overly simplistic, because there could be multiple winners — the higher the jackpot, the more players, so the more likely there will be a split pot.
3
John @ Machined Parts Says:
March 30th, 2012 at 2:13 pm
For fun, we bought one for ticket for every member of our families and are just excited to see if someone wins or the pot grows even more. There was a blip in the news that ticket sales were at 1 million per hour today.
4
Hazzard Says:
March 30th, 2012 at 2:13 pm
We bought $5 worth of tickets. I think it’s about the third time I’ve ever purchased a lottery ticket but it’s kind of fun when it gets to be that much money. The only drawback was trying to convince our 8 year old daughter that we really weren’t going to win. I finally had to tell her that it was much more likely that she’d be hit in the head by a flying rubber chicken thrown out of an airplane by a monkey. I think she started to understand the odds a bit better after that.
5
lostAnnfound Says:
March 30th, 2012 at 3:05 pm
My husband & I each bought one ticket and our 18 year-old also bought one for herself…all just for fun. But, if I did win, I think I’d have to hide for a while to get over the shock and then decide what to do with the money.
6
Jill Says:
March 30th, 2012 at 3:13 pm
Hubby is buying 4 tickets (one for each of us) on his way home (full disclosure, bought one ticket for Tuesday, won $3 so total outlay is only $2, really). Our first outlay from the lump sum would be to fully fund a church preschool expansion. After that, the list of charities we are passionate about is long. Husband would keep working as we feel work ethic is important to demonstrate to our kids. And since he’d still be commuting, the fuel efficient diesel Jetta would not be replaced. How’s that for big spending? The rest? Invested.
7
Evan Says:
March 30th, 2012 at 3:16 pm
I am in a couple of pools ($70 is my share of the tickets purchased)…

If I won the whole thing? I think I would quit my job and focus on growing my cash…I’d be my own Hedge fund LOL but like you I wouldn’t take much risk there is no need.

I would have a stupidly large house though ha gotta live a little
8
Courtney Says:
March 30th, 2012 at 3:34 pm
Read an article by a statistician that when you account for taxes, odds of multiple winners, etc the EV of a ticket is only greater than the $1 cost when the jackpot is over $330M.

Hubs is in an office pool for a total of 640 tickets ($20 each). One share of the jackpot would be about $9.6M after taxes.
9
Maggie@SquarePennies Says:
March 30th, 2012 at 4:39 pm
Not so far, but it’s tempting. Yes, it’s a stupidity tax, but you can’t win if you don’t play. My husband is against it on morality grounds. He says he doesn’t want any money he didn’t earn. Sigh.
10
Financial Advice for Young Professionals Says:
March 30th, 2012 at 6:23 pm
I’ll buy a ticket or two when it’s over a hundred million, but would never play regularly
11
Dave Greenwood Says:
March 31st, 2012 at 12:41 am
Of course the chances of winning are extremely slim, but if you did win – there’s that ‘but’ that gets you thinking …
12
Rich Says:
March 31st, 2012 at 11:06 am
I’ll refer to the fact that at least one person won the big one, which means THAT person bought a ticket! As for what I’d do if I won, of course I’d pay off everything for myself and family, then set up a fairly meager stability-guaranteeing system for myself. Then I’d hire a professional to work on creating a self-perpetuating fund to create and sustain a nationwide system of foster care homes, where children would receive good nutrition and care, physically, mentally and emotionally; placed where there’s the highest need and monitored for best practices. Why? Because I don’t think anyone else is going to do it.
13
Miiockm Says:
March 31st, 2012 at 2:41 pm
I don’t get the tax on stupid people remarks. It’s just a couple dollars for a little excitement in your life.
14
almost there Says:
March 31st, 2012 at 4:58 pm
I don’t play the big money raffles. I like to support local charities like the mile high raffle. just under 4 days left to get in on an early bird prize I hope to win the $2,000,000.00 annuity. If all tickets sold the odds are 1:36,000. $150 per chance but it does support the Denver boys and girls clubs. 319 other prizes from 25k to the price of your ticket.
15
Ryan Says:
April 1st, 2012 at 4:23 am
I think the “tax on stupid people” comes from the people that effectively invest in the lottery, buying $5 worth of tickets every day in scratch-offs and numbers games. Instead of spending $25 – $35 a week on lottery tickets, you could just buy SPY or some other index ETF, the odds of success are much better.

I live in England now, but used to live in a mega millions state. When the jackpot would get huge, like over $200M my friend and I would put $10 each and get 20 tickets. We’d sit around boozing on the couch, waiting for the drawing, talking about what we’d do with all that money. I think it was worth the $10 just to have a giggle about how and when we’d quit our jobs, where we would build our mansions, etc.

Of course, if I did win, the first thing I’d do is lawyer up. I’d hold off about 30 days before claiming the ticket while I get everything in order. Ideally I’d like to remain anonymous, claim the ticket under a trust of some sort, but I don’t really think it’s possible to maintain anonymity if you win the jackpot.
I’d take the lump sum, dump half the money into some conservative bond funds paying monthly distributions, another 25% into investment-grade dividend stocks, and hold the remaining 25% as cash. Would use charitable contributions each year to lessen my tax burden. I wouldn’t buy flashy cars or huge mansions, I would just do awesome vacations around the world, flying first class and staying in 5 star hotels.

Someone told me the Euro-millions is tax free, and that I should buy tickets when the jackpot is huge. Looks like the jackpot £17,000,000 right now. Of course, as soon as Uncle Sam finds out I’ve taken a huge windfall in the UK he’s going to want a piece of it, since my global income is taxable in the US. Bummer.
16
Kevin R. Says:
April 2nd, 2012 at 6:51 am
I’ll fully admit it is a “stupid person tax,” even when I am willing. The odds are just that long. Then I might spend a dollar for a carnival game, which for me, has just as long of odds. Thinking it’s entertainment is a healthy way of looking at it, but I also think the “stupid person tax” is good to remember as a hedge to keep it entertainment. It’s okay to get “stupid” once in a while, I’ll still drop a dollar at the county fair for fun, but knowing the probably outcome keeps me to only one or two games.
17
Rob Says:
April 2nd, 2012 at 8:08 am
Here is a Powerball simulator also http://www.justwebware.com/pow.....rball.html
18
Bucky Says:
April 2nd, 2012 at 4:18 pm
DanR: You’re forgetting about the fact that the lottery only pays out about 50% of its revenue (the rest goes to state funds) and federal+state income tax, which could be another 50%. So you really need 176/0.5/0.5 = $704M jackpot before it’s mathematically advantageous.

And you’re also forgetting that when the jackpot gets big, way more tickets are sold, so the chance of splitting the winnings also increase. In fact, for this time, there were 3 winners.

Top Cards by Category

CASH BACK CREDIT CARD (see all)

Blue Cash Everyday^® Card from American Express

Earn 100 Reward Dollars after you make $1,000 in purchases in the first three months of Cardmembership.

AIRLINE MILES / REWARDS POINTS CREDIT CARD (see all)

The Platinum Card^® from American Express

Earn 25K Membership Rewards(R) points after you spend $2,000 during your first three months of Card membership.

CREDIT CARD DEALS (see all)

Simmons First Visa^® Platinum

Consumer friendly credit card with a great low rate of 7.25% and save on interest charges. No balance transfer fees and no annual fee.

BALANCE TRANSFER CREDIT CARD (see all)

Discover it^® - 18 Month Balance Transfer

The new Discover it card is out to change the way people think about credit cards. No annual fee. No overlimit fee. No foreign transaction fee & no pay-by-phone fee. No late fee on your first late payment. And Discover won't increase your APR for paying late.*

LOW INTRODUCTORY RATE CREDIT CARD (see all)

Discover it^®

LOW INTEREST RATE CREDIT CARD (see all)

Simmons First Visa^® Platinum

Consumer friendly credit card with a great low rate of 7.25% and save on interest charges. No balance transfer fees and no annual fee.

BUSINESS CREDIT CARD (see all)

The Business Platinum Card^® from American Express OPEN

Limited Time Offer: Get 25,000 Membership Rewards(R) points after you spend $5,000 in the first three months of Card membership. Enroll and select a qualifying airline to receive up to $200 annually in statement credits for incidental fees, such as checked bags and in-flight refreshments, charged by the airline.

STUDENT CREDIT CARD (see all)

Discover it^® for Students