An overwhelming amount of lottery participants seem to reside in the lower economic classes, according to the stats. Lottery retailers collect commissions on the tickets they sell and also cash in when they sell a winning ticket, usually in the form of an award or bonus.
A curious headline was placed on the homepage of the Mega Millions website on March 25, , a day when the odds of winning flew up to 1 in million. The headline read, "Save for Retirement. Is there a better, more profitable, way to spend or invest the money you'd otherwise devote to the lottery? Let's look at the numbers. Of course, the stock market is never a sure thing. Stocks can depreciate as well as appreciate. So let's try a more cautious estimate.
Let's say, despite the dismal odds, you do win the lottery, and you win big—six figures big. You're going to face a lot of decisions, and the first one is how to receive the funds. With most lotteries, you get a choice: they can write you a check for the lump sum amount or you can receive it in the form of an annuity. The lump sum is a single cash transfer, whereas the annuity is a series of annual payments often spread out over 20 to 30 years. Unlike some annuities that end when you do, this is something called an annuity certain : the payouts will continue for the set term of years, so if you pass away, you can bequeath those payments to whomever you would like.
Which should you take? Only six states allow winners to remain anonymous, while three others allow them to collect winnings through an LLC. Most lottery winners opt for a lump sum payment.
They want all of the money immediately. That is the main advantage of a lump sum: full and complete access to the funds.
Not only do individuals like that, but their newly acquired giant team of accountants, financial advisors , money managers, and estate lawyers do too—the more assets under management, the better, especially if their compensation is based on a percentage of those assets.
Taking a lump sum could also be the better course if, not to be morbid, the winner isn't likely to live long enough to collect decades of payouts, and has no heirs to be provided for. You may be in a better income tax position if you receive the proceeds over several years via an annuity rather than up front.
Lottery wins are subject to income tax both federal and state, except for the few states that don't tax winnings in the year you receive the money. If you take the lump sum option, the entire sum is subject to income tax that year. However, if you choose the annuity option, the payments would come to you over several decades, and so would their tax bill. Not according to the experts. If you choose the annuity option, the government takes your winnings and invests them for you—most likely in boring, yet highly stable Treasury bonds.
Usually, when you invest, you pay taxes, but when the government invests they do so free of all tax obligations.
If the government invests it, you only pay a tax bill once on the annuity checks. But perhaps the biggest argument for taking the annuity is more intangible—to protect you from yourself. A six-figure windfall is a life-changing event, and not necessarily a good one.
Most people are inexperienced at managing such sums to begin with, but even the wisest and coolest of heads could lose perspective, especially given the avalanche of friends, family, and even strangers that descends once the news gets out, pleading or even demanding a share of the spoils.
Academics cite research showing most lottery winners will save only 16 cents of every dollar they win and that one-third of lottery winners go bankrupt.
An annuity can help, by literally limiting the funds in your possession. After all, you can't give away, squander, or otherwise mishandle what you don't have. Plus, taking the money over time provides you with a "do-over" card. By receiving a check every year, even if things go badly the first year, you will have many more chances to learn from mistakes, recoup losses, and handle your affairs better. Inheritance factors are generally free standing but there can be some considerations where lottery inheritance is involved.
Taxes are generally withheld from lottery distributions at the time they are paid out. If payments are made in a lump sum, the inheritance can be passed along tax free since inheritance gifts are generally not taxed.
If the payments are still coming in as an annuity, taxes will be withheld. As in all inheritance scenarios some estate taxes may be required if values exceed the exclusion limit.
Since lottery winnings push many people into the high net worth category, estate taxes may be a factor. This can be a challenge if the heirs do not have the cash on hand to do so.
In some states Powerball will convert annuities to lump sums upon death to help better manage any tax burdens. If you ever do win the lottery, you will want to work with your financial advisor, tax attorney, and certified public accountant to determine which option is best for you—taking the winnings all at once or in annuitized payments over decades. Many people see purchasing lottery tickets as a low-risk investment. The risk-to-reward ratio is certainly appealing, even if the odds of winning are remarkably small.
The Big Roller needs extraordinary resources: millions of dollars of capital, hundreds of hours to fill out purchase slips, dozens of Lackeys to complete the purchases, and retail outlets willing to cater to massive orders. To understand the challenge, witness the dramatic tale of the Virginia State Lottery. Even better, the risk of a split prize was reassuringly small: Only 6 percent of previous Virginia lotteries had resulted in shared jackpots, and this one had climbed so high that it would yield profit even if shared three ways.
And so the Big Roller pounced. An Australian syndicate of 2, investors, led by mathematician Stefan Mandel, made their play. They worked the phones, placing enormous orders at the headquarters of grocery and convenience store chains.
The clock labored against them. It takes time to print tickets. By the time of the drawing, the investors had acquired only 5 million of the 7 million combinations, leaving a nearly 1 in 3 chance that they would miss out on the jackpot altogether. Big Rollers like Mandel enjoyed profitable glory days in the s and early s. But those heady times have vanished. As tricky as the Virginia buyout was, it was a logistical breeze compared to the daunting prospect of buying out Mega Millions or Powerball each with more than million possible combinations.
Factor in post-Virginia rules designed to thwart bulk ticket purchases, and it seems the Big Roller may never find the right conditions for a return. For psychologists, economists, probabilists, and various other -ists of the university, nothing is more intriguing than how people reckon with uncertainty. How do they weigh danger against reward? Why do some risks appeal while others repel? But in addressing these questions, researchers encounter a problem: Life is super complicated.
Ordering dessert, changing jobs, marrying that good-looking person with the ring — to make these choices is to roll an enormous die with an unknown number of irregular faces. Lotteries, by contrast, are simple. Plain outcomes. Clear probabilities. You see, the behavioral economist is not here to play, just to watch you play. The scholarly fondness for lotteries goes back centuries. Take the beginnings of probability in the late s.
This age saw the birth of finance, with insurance plans and investment opportunities beginning to spread. Instead, amateur probabilists turned their eye to the lottery, whose simplicity made it the perfect place to hone their theories. More recently, the wonder duo of Daniel Kahneman and Amos Tversky identified a powerful psychological pattern on display in lotteries. For that, I introduce you to our next line-buddy Thus, it shares the same expected value as A.
Such behavior is called risk-averse. But this time, most people find the guarantee less appealing. Here, they are risk-seeking. These choices are characteristic of prospect theory, a model of human behavior. When it comes to gains, we are risk-averse, preferring to lock in a guaranteed profit.
But when it comes to losses, we are risk-seeking, willing to roll the dice for the chance to avoid a bad outcome. A crucial lesson of prospect theory is that framing matters. Take this contrast:. This line of research has a sad and illuminating implication for lottery ticket purchasers.
Think of how a basketball team, trailing late in the game, will begin fouling its opponents. Or how a political candidate, behind with two weeks until the election, will go on the attack, hoping to shake up the campaign. These ploys harm your expected value. But by heightening the randomness, you boost your chances at winning. Yes, on average, you lose. Hey, look at that fresh-faced young lottery player! Does the sight fill you with nostalgia for your own youth?
It can happen. There is always the chance you might have missed something. They analyze the layout and design of a scratch card to pick up on patterns that can give clues as to whether a scratch card has certain numbers, symbols, or combinations that can lead to a win. Most scratch card manufacturers have caught onto this strategy and a large number now design their scratch cards to work against it. This just seems to make logical sense. If you stick with a game and keep playing it then you will either win, or every losing ticket you play will be one more losing ticket out of the equation.
However, if you spread your spending over a number of games then you could just endlessly be hitting losing scratch cards. We may not have been able to show you how to win scratch offs every time if there was one simple trick, everyone would be doing it and companies would stop creating them!
By Ethan Baker June 16, Most Popular. Guides Strategy.
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