The odds on the $400 million Mega Millions jackpot appear to be in your favor. At $1 per ticket, and a 1 in roughly 260 million chance of winning, it appears you'd come out a winner.
Each ticket sold for $1 should net about $1.53 in expected winnings, including only the jackpot, not the much smaller prizes.
Great deal, huh? Not so fast!
Don't forget the payout schedule
The estimated $400 million prize pool is for those who take the annuity option -- an initial payment plus 29 annual payments which increase 5% year after year. Because of the way the annuity is structured, the majority of your winnings would come in the last 10 years of the annuity.
In fact, the last five payments are worth more than the first 16 annual payments. Taking the annuity is a generally terrible idea -- by the 25th year, when the payouts become especially lucrative, you can bet the purchasing power of a dollar will be much lower.
Cash option and taxes
The cash option -- one-time payment in lieu of the annuity -- is worth all of $218 million. With tickets priced at $1 each, the expected value of the jackpot winnings is $0.83 per $1 ticket.
That's no good. And in many jurisdictions, $218 million in winnings may look more like $109 million after all federal, state, and local taxes are paid. So, let's make it $0.41 per dollar "invested" in the Mega Millions jackpot.
Suddenly, buying a ticket doesn't make much sense. But for those of you who need a reason to buy a ticket, there's at least one good reason to do so.
$1 doesn't matter
Some call the lottery a "tax on people who can't do math." They're right, except for the fact that the math says buying a ticket isn't a necessarily bad idea.
The simple reality is that the lottery is a terrible investment. However, the alternative, which is having all of one more dollar in your pocket, isn't really a great thing either.
Let's go to the extreme. Suppose you had a choice between playing the lottery five times a year, or saving the money for retirement. Even after 50 years of compounding, and probably unrealistic 10% annual returns, you'd have $5,819.54 saved as a result of avoiding the lottery, or about $20 per month in extra retirement income.
Ocassional lottery players aren't going broke. Those who preach that you should avoid the lottery aren't getting rich. The fact of the matter is this: Lotteries should be played for pure entertainment value. For some, including me, the dream of having a $400 million payday is worth the full $1 price tag.
A better choice than the lotto
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