Odds of winning the Powerball

Powerball odds

You’ve seen the statistics. You know that you have a better chance of becoming President of the United States (1 in 10 million) after having flipped a quarter and getting heads-up 28 times in a row, giving birth to identical quintuplets (1 in 15 million) and then abruptly dying after being crushed by a snack-vending machine (1 in 112 million) than you do of winning Powerball (1 in 1 in 292.2 million).

That said, the North American Association of State and Provincial Lotteries would like you to know that those dismal odds aren’t quite as hopeless as they seem.

The Association is particularly skeptical of the oft-cited statistic that you’re more likely to get hit by lighting (1 in 700,000) than win the lottery, cheerfully pointing out that there’s “no second prize in a lightning strike” and adding that “lotteries award over $50 million in prizes in North America every day. Lightning isn’t nearly that productive.”

The Association does have a good point – the big prizes aren’t the only game in town.

Beware of Sudden Wealth Syndrome

One in every three Americans firmly believes that winning the big jackpot is the only way they’ll ever become financially secure, Perhaps that’s why millions of dollars in lottery prizes go unclaimed every year.

In 2013, the last year for which data is currently available, there were more than $500 million in unclaimed lottery prizes from scratch-off games, Lotto and daily games. Lottery officials assume that people just toss their tickets if they don’t win the big one, never bothering to check if they might have won a smaller few hundred buck prize.

And most of us will keep right on hoping for that huge win, despite the huge odds and the fact that winning comes with its own set of problems, dubbed “sudden wealth syndrome.” Bankruptcy, divorce, depression, stress – the majority of jackpot winners tend to have pretty lousy lives after their big windfall.

The (sort of) good news is that if a lottery winner does somehow manage to hold their relationships, financial status and lives together for five years after winning, they’ll probably be fine.

The bad news is that 90% of the winners have already burned through their lottery prize before those five years are up. A study published in The Review of Economics and Statistics indicted that lottery winners were much more likely than the general population to go bankrupt within five years.  That may be due to something known as “mental accounting,” which makes us treat found money far less seriously than we do earned money.

One Lump Sum, Please?

One of the things that trips many people up is how much money you need to live the lifestyle of a very wealthy person. On average, according to a New York Times article, you’d have to have access to about $100 million, after taxes. Of course, most of us would happily settle for much less. And perhaps that’s why, according to the book “”Life Lessons from the Lottery: Protecting Your Money in a Scary World,” 95% of lottery winners choose to receive their payout in one immediate lump-sum payment rather than as a structured settlement that provides annual payments spread over a long-term period. You get less that way, but you get it now.

No matter which option you choose though, you’ll still end up with significantly less than the much hyped amount of the jackpot prize. Federal taxes will take about 39.6%, (at today’s rates) and you may need to factor in state and city taxes too — Florida, New Hampshire, Tennessee, Texas, South Dakota and Washington) don’t have a state income tax, and California and Pennsylvania don’t tax residents’ winnings if bought their tickets in state. If you live elsewhere, you’ll pay. New York City residents pay the most, with 8.82% for the state and 3.88% for the city. You can see exactly how much you’ll win – and how much you’ll pay for the privilege of winning – if you win this week’s prize in Mega Millions or Powerball.

If you decide not to take your winnings in an annuity you get the “cash equivalent” of the jackpot. As an example, in March 2012, when the Mega Millions jackpot was a record $656 million, the pre-tax cash value was $471 million. This is because both Mega Millions and Powerball come up with a figure for their jackpot based on the amount of cash they currently have in the pot (the cash value of the prize) and its estimated 29-year annuity value. The estimated value is the jackpot total. State lotteries work on a similar basis for their big prizes.  If the winner chooses the annuity option, the cash is invested in U.S. Government Treasury Securities, and the proceeds are paid to the winner over that 29-year period, following an initial payout when the prize is claimed.  If the winner wants a lump sum payout, they get that cash equivalent.

Deciding whether to accept a lump sum or annuity payment is a job for your team of financial advisors and attorneys, who you should hire shortly after realizing you won a big jackpot. (In fact, it’s best to find and hire these experts before you turn in your winning ticket). Your team should explain the benefits of each option. They may advise you to accept the annuity initially and let the money sit there quietly while you adjust to your newfound wealth and explore your investment options and tax exposure. This is especially true if you tend to be less than disciplined when it comes to money management.

Winning the jackpot requires beating huge odds, as does peacefully enjoying your windfall after you’ve claimed it. There’s nothing you can do to increase your odds of winning, but once you’ve won the big prize you can – with a little planning and self-discipline –enjoy your newly prosperous life.

Didn’t win? Fret not. There are plenty of ways to live well and prosper.  For example, a dental savings plan will enable you to cut your dental bills by 10-60% or you can get dental insurance.

Don’t scoff. Your chances of having severe dental decay are way higher than your chances of winning the jackpot!

 

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