WC Varones

Don't lend your hand to raise no flag atop no ship of fools

Should you play the Mega Millions lottery?

UPDATE 3/30: Don't buy!

With the Mega Millions jackpot up to $241 million, is it worth buying a ticket? $1 for a 1-in-175,711,536 chance at $241 million sounds like a winning bet.

But not so fast.  The $241 million is only if you take the annuity option, and a lot of that is in future, devalued dollars.  The cash payout is $170 million.  So it still sounds like an almost even money bet.  Ah, but taxes.  Federal taxes on that $170 million will be 35%, bringing your haul down to $110.5 million.  And then there are state income taxes.  California exempts lottery winnings, but some states don't.

Now if you can avoid the taxes, it's still a close bet.  If you buy a few tickets, you can't deduct your gambling losses unless you have offsetting gains.  But if you buy all 175,711,536 combinations, you'd guarantee yourself the jackpot, and you'd have offsetting gambling losses on all the losing tickets so you'd pay no tax.  So at current jackpot levels, you'd lose $5.7 million on the main jackpot, and you'd earn $11.25 million on 45 tickets with the 5 winning numbers without the Mega number worth $250,000 each, $2.55 million on 255 4-of-5-plus-Mega tickets worth $10,000 each, $1.7 million on 11,475 4-of-5-without-Mega tickets worth $150 each, $1.9 million on 12,750 3-of-5-plus-Mega worth $150 each, $4 million on 573,750 3-of-5-without-Mega tickets worth $7 each, $2 million on 208,250 2-of-5-plus-Mega worth $10 each, $3.75 million on 1,249,500 1-of-5-plus-Mega worth $3 each, and $4.7 million on 2,349,060 0-of-5-plus-Mega tickets worth $2 each.

Add it all up, and you'll win $32 million on top of the $170 million jackpot, for a total of $202 million and a profit of $27 million over your $175 million cost. So if you have the capital and the operational capability to buy all the tickets, it looks like a good deal... unless somebody else also wins and you split the jackpot. The odds of another winner are usually very low, but they increase as more people buy tickets. And more people buy tickets when the jackpot gets big. If other people buy 50 million tickets for this draw, there's a roughly 28% chance you lose half the jackpot and end up with a $58 million loss. There's also a much smaller chance that two other tickets win and you have to split the pot three ways for an $86 million loss. Factor these in and it becomes just about an even-money bet at these levels. If the jackpot goes much higher, it becomes a real winning bet.

For those of us who don't have the ability to buy all the tickets and net the gambling losses off for tax purposes? No, it's still a big losing proposition.

But then again, a buck can't buy you a loaf of bread or a gallon of milk, so why the hell not?

3 comments:

The Lazy Paperboy said...

As a connoisseur of this laziest of retirement plans (and I mean that literally; I win, I'm retired) I think you're overshooting the federal taxes on this.

The calculation I do when I start allocating my potential jackpot begins with a 25-percent cut to the IRS, and then my state tax (I don't get to opt out of that one.)

All in all, when the numbers get as high as they are (and thanks for the update; I didn't know yet that I hadn't hit the $200M prize the other night) the daydreaming value about life after winning outweighs those other costs of doing business.

But just in case, I may bring my winning ticket out there to cash it in, if you don't mind adopting me.

W.C. Varones said...

Lazy,

I do believe that lottery universe link has its facts wrong.

I think there is a 25% withholding, but you eventually have to pay up the full ordinary income tax rate (currently 35%).

I can't find any authoritative source like the IRS that suggests there's a preferential tax rate for lottery wins.

The Lazy Paperboy said...

Well, damn it.

But you'll still adopt me, right?

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