Lotto Fever!

Today’s projection for the PowerBall jackpot jumped to \$600 million. Because the odds are so ridiculously bad, all of the money that people who lost in previous weeks could eventually store up and make playing the lottery a good investment. Like if you could pay \$1 on a dice roll and win \$10, that would be totally worth it (the 10 to 1 payoff is greater than the 6 to 1 odds of losing). So I looked up the odds of winning PowerBall: 175 million to 1. Even though it costs \$2 to play, winning \$600 million for an investment of \$2 seems like it works pretty well. It’s a 300 million to 1 payoff and the odds are 175 million to 1.

But the \$600 million is the sum of each year of payouts if you choose that option (which nobody does). The cash payout is less, though they don’t tell you exactly what it will be. I looked up a big payout from last year and the cash payout was 65.5% of the annuity option. So that \$600 million is down to \$393 million. And now the return is 196 million to 1. Still, there is a slight edge in your favor. Well, except that you will be taxed at the highest imaginable rate on those winnings. The top federal income tax rate is 39.6% and the state income tax rate is 6%, so you only take home 54.4% of the cash payout, leaving you with \$226 million. Now the payout is 113 million to 1, well below the 175 million to 1 odds of the drawing (and this still assumes you are the only winner, though when lotto fever hits and tons of people buy tickets, the chances of 2 winners goes up and the payback ratio is much less). How much does PowerBall jackpot have to go up to for you to break even, assuming 1 winner? \$932 million. So I’m sitting this one out.

I did the same calculations the last time the other big lotto contest, Mega Millions, was pushing a big jackpot. Though the number of ping pong balls in the bins are different, the odds of winning the Mega Millions jackpot are about the same as PowerBall: 1 in 175 million (not anymore, see comment below). I don’t know why exactly, but the last big payout they had, the cash option paid 72.2% of the advertised jackpot (found out later it was because they were paying out over 20 years instead of 30 years like Powerball, but not anymore). The tax rate is the same, but the ticket price is only \$1. Therefore the break-even jackpot for Mega Millions is only \$423 million, which it actually reached last year (last time I bought a lottery ticket), while the PowerBall has yet to reach a break even jackpot.

3 thoughts on “Lotto Fever!”

1. A winner was picked. One statement I saw said that so many tickets were sold that 80% of the possible numbers were picked by people.

2. Today the Mega Millions jackpot grew to \$425 million. I thought that might be a good time to buy based on my calculations above. But I found out that the rules changed in October and the odds are now much worse: 1 chance in 258,890,850 because the numbers now go to 75 (though the 6th ball is only 1 to 15). They also now pay out the winnings over 30 years instead of 20 years, meaning if you pick the cash option that you will receive a smaller percentage of the nominal jackpot. They said for a jackpot of \$636 million, the cash option would be only \$341 million, or 53.6% of the nominal jackpot. That means the break-even jackpot for Mega Millions is now \$888 million. They are selling tickets very fast, and the last drawing had 9 people match all 5 balls from the batch of 75, but none of them matched the sixth ball from the batch of 15.

3. Lotto fever strikes again as the largest jackpot in the history of the world is now at stake. Does it meet my requirements for a good investment? Not yet. The lump sum payout ratio is 61.1% lately and the odds of winning a jackpot were reconfigured last October with more balls in the group of 5 numbers and a few less in the Powerball bin. So now the odds are 1 in 292 million. The jackpot needs to go up to \$1.76 billion for the odds to be in your favor. They are saying the next drawing will be \$1.3 billion and it could go up more before Wednesday, so I might need to buy a ticket.