The current Powerball jackpot is one of the largest in history and is just over $1 billion. It sounds like a good investment: Buy a $2 lottery ticket and win $1 billion. What a dream come true!
But what are the chances of it happening and is it really an investment? We take a look at how the lottery works, what happens if you win, and how it rates as an investment tool.
What Really Is a Lottery?
A lottery is a random drawing. It’s similar to drawing lots, which in past centuries was used to make decisions. Here’s how it works:
Straws, pieces of paper, or other small objects that are identical (except for one) are placed in a bag or container. People then reach into the bag and draw out one of the objects without looking. The person with the object that is different from the others is the winner or, in some cases, the loser.
This was seen as a random, non-biased way to make decisions that were fair to everyone. No one wanted to be the first to cross the rickety bridge, be on the front line of the battle, or drink from the cloudy river, but if you happened to draw the short straw, it was deemed to be your fate. While this method is still used today, it is more often done at parties, bridal showers, and teen youth group events as a way to have fun and give out prizes rather than determine who will step first into the lion’s den.
It’s on this idea of drawing lots that the modern lottery is based. Powerball and Mega Millions are both popular games of chance. You buy a ticket for a small fee and if your number is randomly drawn, you win the monetary prize.
And currently, that prize is very large. The person with the winning ticket is slated to win just over $1 billion.
Forty-five states, plus Washington D.C., Puerto Rico, and the U.S. Virgin Islands participate in U.S. lottery games. Alabama, Alaska, Hawaii, Nevada, and Utah do not sell tickets. The Multi-State Lottery Association facilitates and conducts several state lotteries and the Powerball.
How do states benefit from lottery ticket sales? Each state is different. For the most part, after paying a portion to the winning ticket holder and the lottery administrative costs, state governments then funnel the remaining money into various public works programs such as education, homeless shelters, roads, public safety, and transportation.
Winning the Lottery
So, what happens if you actually win the lottery? Let’s first back up and talk about how a winner is determined and what the chances are of winning.
Once you purchase a lottery ticket, you must select six numbers. In the case of Powerball, the first five numbers must be between one and 69. The last number must be between one and 26.
When it comes time to determine the winner, the first five numbers are drawn from a machine containing white balls. The last number is drawn from a machine containing red balls. The numbers are announced and the winner claims their prize.
If there is no winner (It happens! Tickets are forgotten, lost, or stolen), then the prize money is added to the next jackpot. As the jackpot grows in amount, people are attracted by the big payout and rush to buy tickets. Even those who normally don’t play the lottery are enticed by the 10-digit potential winnings.
If you are the lucky person whose numbers match up to those drawn, you are the winner. Now you get to decide how you want your payout. Lump sum or in increments over the next 30 years?
A lump sum payout of $1 billion sounds great, but you will most likely wind up with a little over $300 million after paying federal and state taxes, depending on your current taxable income. If you choose to be paid in installments over a 30-year time period, you will net somewhere between $21 to 30 million a year, depending on your state of residence and income.
Does all this sound too good to be true? It kind of is. The odds of winning the lottery are 1 in 292 million. And buying more than one lottery ticket does not better your odds.
To provide some context, here are some other odds:
● Being struck by lightning: 1 in 15,300
● Getting stuck in an elevator: 1 in 100,000
● Being attacked by a shark: 1 in 11.5 million
Obviously, the likelihood of experiencing a lightning strike, non-operating elevator, or shark attack is very, very small. So, is being the winner of the Powerball. Your chances are not just extremely low, they are minuscule.
Investment Tools
Some folks have touted buying a lottery ticket as “investing in your future.” Granted, the risk-to-reward ratio is great. A $2 ticket is a pretty low risk for a potentially huge return.
You may be thinking, “Well, if you don’t buy a ticket, then you don’t have a chance of winning.” And you are correct. But think about it: if you do buy a ticket, your chance of winning is even less than your chance of being attacked by a shark. Those just aren’t good odds.
On average, people spend $370 per year to purchase lottery tickets. Over 20 years, that amounts to $7,400 spent on tickets. At the end of 20 years, you may wind up with a few hundred dollars in winnings, maybe.
Now, using an investment tool like the stock market and placing $370 annually into stocks, you will get quite a different return. At the end of 20 years and with a 5% expected rate of return, you will come out with $12,386. Those are real winnings!
Conclusion
It’s easy to get swept up in the excitement of the lottery and potentially winning a huge sum of money. However, your chances are extremely low. Your ticket money can be better used on something that yields better and more likely returns.