You have a 1-in-292 million chance of winning this Wednesday’s Powerball draw. A single ticket costs $2, and the main prize is $1.3 billion. I bet this looks good to many of you, but allow me to explain why the opportunity to win the Powerball is much worse than it looks at first sight.
How $1.3 Billion Turns Into $487 Million
Firstly, the actual cash payout is $806 million, not $1.3 billion. The advertised $1.3 billion is paid in the form of annuity payments over 29 years and is worth much less when adjusted for inflation. So $806 million is the real amount of cash you can win.
But it gets worse.
In case you win, the government charges you with a 39.6% federal tax. So after paying around $320 million in taxes, you’re left with $487 million of spendable winnings.
Depending on your state, you may have to pay state taxes as well. As Sandra Block points out, New York residents pay the most state taxes (8.82% of the jackpot), and New York City residents even more (3.876% on top of that).
So $487 million is the maximum amount you can win, and it may be less depending on your state.
Can it get even worse? Yes.
It’s possible that over 500 million tickets are sold for the $1.3 billion jackpot drawing (after all, 440 million tickets were sold for the $948 million drawing.)
So with 500 million tickets sold, more than one people may easily win the Powerball, which lowers the jackpot amount even further.
As I’ve mentioned before, lotteries have an exemption from truth-in advertising. No other business would be able to do what the government does: claim the Powerball jackpot to be $1.3 billion, when in reality you stand to win less than $500 million at most.
A lot of money, yes, but nowhere near what many think it is.
It’s good to be in the government business.
Last Year, Winning the Powerball Got Even Harder
Powerball changed the rules of the lottery last year and simultaneously cut the odds of winning the jackpot in half (from 1-in-175 million to 1-in-292 million).
They also increased the likelihood of small wins (the odds of winning something increased from 1-in-32 to 1-in-25).
Why?
So that people would get something out of the lottery more often, but also to create a huge Powerball drawing like this and create headlines (the harder a jackpot is to win, the bigger it becomes until someone wins it).
A quote from the Powerball website:
Beginning in October, 2015, Powerball® became an even larger combined large jackpot game and cash game. Every Wednesday and Saturday night at 10:59 p.m. Eastern Time, we draw five white balls out of a drum with 69 balls and one red ball out of a drum with 26 red balls. This change means bigger jackpots. It also means that your odds of winning some prize are improved.
Not only is the Powerball a horrible financial investment (although you might get a lot of entertainment-value out of it), since the house edge is around 60%, but the government takes a 39.6% cut out of the winnings.
You might also be interested in my article on How State Lotteries Prey on the Poor and Rarely Increase State Education Budgets.
