Lottery Odds

Published on October 16, 2005 By TaBoo Tenente In Blogging

Inspired by an artice by Mr. Frog:

A lottery ticket costs $1 . . . though I don't know much about the multiplier thingie . . . do you need to go multiplier to win the big jackpot?

All right, going with the $1 figure, :et's say that your odds are 1:187,000,000 and the jackpot is $300,000,000:

1) Without any other factors, you're getting about 1.6 to 1 pot odds for every ticket you buy;

2) However, if you take the cash option, how much do you get? A little over half, say $187,000,000 for the sake of conversation?

3a) With the cash option, you're still getting about even money for every ticket you buy;
3b) Going with the annuity, you remain at about 1.6 to 1;

4) Then there's the tax problem, which knocks the whole thing down 50%ish. so:
4a) Cash option, you're only getting 1 to 2 odds . . . not so good;
4b) Annuity: even money;

5) Of course, there's the chance that you might win a secondary prize, which ups your odds, but there is also the chance that someone else will hit the same numbers and you'll be forced to split the pot. Let's call it a push to keep things easy;

6) Let's talk inflation:
6a) Cash option, this doesn't affect you considerably. you can re-invest your money and make some of the tax/cash option losses back, but unless you have plans to spend the rest of the bundle, you'll probably end up losing more per dollar compared to your present day dollar;
6b) Annuity, you lose even more. You don't get to re-invest the large sum, and you lose via inflation with every check you receive;

7) So at $300,000,000, even the annuity is a slight dog pot-odds-wise, while the cash option has sunk to 1 to 2.5 or worse, pot-odds-wise;

8) However, you have to factor in RISK. My guess is that to you, one dollar spent now means very little in respect to your style of living. On the other hand, $75,000,000 (probably the approx. value of the cash option after all factors have been included) will give your style of living a kickstart like tnt. So depending on your current financial situation, the value of your dollar investment shrinks to $0.25, what . . . maybe $0.50. Again, let's say for the sake of conversation that $0.50 is your risk factored dollar value;

9) So, if you go with the annuity and spend your winnings with care, an annuity lottery settlement leaves you a slight favorite in relation to pot odds, but the cash option leaves you as a dog.

There you have it. Go buy as many lottery tickets as you can, without spending so much money that your risk factor brings that dollar figure close to $1 again. Only accept the annuity payment plan. And pay me my percentage as your financial counselor.

Thank you for your time.

TBT
Copyright ©2004, ©2005, ©2006 Joshua Suchman. All rights reserved.
Taboo Home
The Phallic Suggestion
Stone Soup Blog Forum
TPS Mirror

Comments

bakerstreet

on Oct 16, 2005

But in the end, won't you end up with far less money that way? The value of the dollar in 20 years is going to be a fraction of what it is now because of inflation.

50% of the winnings, invested even in the most conservative ways, would still end up a lot more than what you'd get getting paid yearly, wouldn't it?

TaBoo Tenente

on Oct 16, 2005

. . . yes, but you'll have to play a different sort of game when it comes to investing. the annuity is a concrete amount . . . so you can establish correct odds for making a ticket purchase. the cash amount is too low to make a ticket purchase a correct investment . . . unless your risk factor brings your dollar value to about $0.20 or lower.

tbt

Mr_Frog

on Oct 16, 2005

Yeah, since nobody won, the pot now stands at $340 mill.

They say that the cash option would get you $154.4 mill out the door.

It's funny because there are some companies out there that invest in this kind of thing.

-- B

bakerstreet

on Oct 16, 2005

" yes, but you'll have to play a different sort of game when it comes to investing. the annuity is a concrete amount . . . so you can establish correct odds for making a ticket purchase. the cash amount is too low to make a ticket purchase a correct investment . . . unless your risk factor brings your dollar value to about $0.20 or lower."

Well, there are, though, investments that offer certain gains beyond the level of inflation, with basically no risk at all. Your money locked up in the lottery annuity degrades in amount every single year, guarenteed.

Imagine, for instance, agreeing to be paid 250,000 every year for 40 years in 1980. Think for a moment what your 200k was worth in 1980 as opposed to what it is worth now. Imagine what it will be worth 10 or 20 years FROM now. 200k wouldn't buy you the house now you could have paid 100k for in 1980.

I'd be willing to bet you give away a lot more to inflation than you give away to the cash option.

Dr Guy

on Oct 17, 2005

I think I will take my dollar and put it into my IRA. You keep your advice, and best of luck. Guess I will never hit the lottery.

TaBoo Tenente

on Oct 17, 2005

frog,

now you're getting to a place where the cash option is viable, odds-wise. i'd be curious to know whether or not those companies that invest in the lottery have to pay the same taxes a normal citizen would. 'course, that would change the whole scenario.

tbt

TaBoo Tenente

on Oct 17, 2005

baker,

i wonder how much a year you get with the annuity?

if you sock away the cash sum, but live off the yearly return, how does that affect inflation . . . i mean, the total cash socked away wouldnt change if you live off the earnings, right? and the yearly sum, though the same (with possible market fluctuations) would lose its worth inflation-wise.

or, perhaps, you would let the earnings ride, collect, and outdistance inflation, but then you havent purchased your aspen chalet or your jet-powered unicycle or your yoohoo taps that run pipes alongside your water, so if you wish you can bathe in yoohoo seven mornings every week.

hmm. again, i wonder what youre yearly payout is with the annuity.

tbt

TaBoo Tenente

on Oct 17, 2005

dr,

actually i agree. the odds may say that buying a ticket makes sense, but my risk factor considers $1 to be valued closer to $5 because im a broke student with credit so bad that people wont even accept my cash.

so i wont be buying tickets myself; i just hope to get a little somethin-somethin on the side for offering my good counsel.

tbt

bakerstreet

on Oct 17, 2005

I think it depends on the overall payoff. The last one I saw, if I remember correctly, was 40 years. In this case, like you say, this is all just semantics because unless you are Paris Hilton or something it is going to be more than you can ever spend either way.

Normally, though, when it is like 10 million, minus taxes, I think you're sound decision is take the money and run.

*** ADDENDUM ***

Just thought I'd give it a look see and it is 30 years. So on a $10 million pot, it would be $333k per year before taxes. In the case of low prizes, I think the sound money is still on the lump sum.

BUT, they also say this. Interpret it as optimistically or pessimistically as you like:

"IS THE CASH AMOUNT THE JACKPOT AMOUNT AFTER TAXES?

No. When we advertise a prize of $100 million paid over 29 years (30 payments), we actually have less than $50 million in cash. When someone wins the jackpot, we take bids to purchase government securities to fund the annuity prize payout. If the winner wants the annuity, we invest the $50 million in cash to fund these payments. The winner gets the cash plus the interest earned. When you see an estimated jackpot annuity prize, we are guessing both what the sales will be and what the market's bond prices will be. The annuity jackpot amount and the cash jackpot amount that we announce area always estimates.

Federal and State Income tax apply to whatever amount you actually receive in a given tax year. If you take the cash amount (say $50 million), then you pay income tax on $50 million). If you take the annuity (say $100 million), then you pay income tax on the money you actually receive each year. "

In that case you are taking a risk with the interest, but you DO get interest, which I didn't know before. Also, your tax burden on the annuity is only subtracted from each payment, not the lump sum at the beginning. So you are also gambling with the future tax rates.

Given that, you'd have a ton of credit leverage on the annuity, if you think about it. You'd have millions of dollars in collateral sitting there drawing interest, and yet not creating any tax burden other than the yearly payment.

Complicated. I believe I would consult an accountant... lol...

Dr Guy

on Oct 18, 2005

Federal and State Income tax apply to whatever amount you actually receive in a given tax year

You see, that is my major beef with the Lottery. It is state run, and so they are being decpetive. They have the money, and they know how much in taxes you will owe, so why do the deceptive advertising? Do you think any private concern would get away with such blantant mis-representation of their product? I think not.

Dynosoar

on Oct 18, 2005

He he he,
Driving to the state line tonight to buy $50.00 worth, same cost as a 1/2 gallon of Knob Creek...can even use the losing tickets as book marks later versus chunking the empty bottle.......

Not long from now I'll get a chance to buy into the lottery here in NC !!!

So it goes.

Dynosoar

on Oct 18, 2005

I think I'm gonna play those numbers from "Lost".

Welcome Guest! Please take the time to register with us.
There are many great features available to you once you register, including:

Richer content, access to many features that are disabled for guests like commenting on the forums.
Access to a great community, with a massive database of many, many areas of interest.
Access to contests & subscription offers like exclusive emails.
It's simple, and FREE!