The Powerball Jackpot Is $500 Million

Years ago several of our states got together and created the Powerball, a multi-state lottery offering jackpots much bigger than any of the individual states could on their own.  The drawing is held twice per week, late Wednesday and Saturday nights.

After my wife and I came up losers on last Saturday's Powerball, I went the next day to buy a ticket, as I saw that no one else had won either.  The ticket had the "estimated jackpot" of $425 million which was attractive enough for me to part with $2.00 to buy one (note that is two bucks, not the usual $1.00 for a run-of-the-mill lottery ticket).

While driving around today I heard on the radio that the estimate had gone up to $500 million, based I suppose on a much bigger round of ticket buying than they expected.  I then went and bought two more tickets, and yes, the newer tickets said $500 million...

This is the SECOND biggest lottery jackpot EVER, only beaten by the "other" multi-state lottery (Mega Millions, which had a $600 million jackpot IIRC less than a handful of years ago).  Wikipedia has an article on the multi-state lotteries: http://en.wikipedia.org/wiki/Multi-State_Lottery_Association.

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I would like to go through some of the arithmetic of this lottery, the drawing being late tomorrow night (midnight Wednesday), whether there are winners should be known within an hour or so (so perhaps 1:00 AM US ET early Thursday morning, November 29).

The jackpot amount is a little deceptive (hey, almost everything about the government involves some deceit...).  If there is but ONE winner (and when the jackpots get big, very often there are various winners who then SPLIT the jackpot), that winner does NOT get a check for $500 million.

1)  The jackpot is $500 million if you take your payments over time ($25 million for each of the next 20 years).  You can elect to take it the winning amount up front, but they discount the $500 million (present value of that $25 million per 20 years), so the amount I heard on the radio today that would be given in a lump-sum would be $320 million (64% of the stated jackpot), which is about my understanding from having observed what has happened in earlier big jackpots...

2)  The winner(s) is/are subject to Income Tax (of course), which would be 35% at current 2012 rates (http://en.wikipedia.org/wiki/Income_tax_in_the_United_States).  That is presuming the winner receives the money BEFORE the upcoming Fiscal Cliff...  Various states impose their own income taxes (New York, Virginia and South Carolina, among many others), so the net winnings would of course be less...

Here in Florida then (should a single winner happen to be from here), the Lump-Sum, Income Tax paid amount would then be approximately $208 million.

In my household, however, my wife and I have agreed to split any big jackpots "50-50", on the reasonable assumption that I buy the tickets, and she gets half the money...  So each of us would get about $104 million, which is not chump change!

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The radio also stated the odds of winning were about 1:170,000,000 for a single ticket.  So, for our case, spending $2.00 for a ticket and winning a net $208 million works out to about $2.00 spent:$208 million or about one dollar vs. $104,000,000.  Which is still WORSE than a "fair" probability (but a lesser cut than the smaller jackpots).  A "fair" amount would be a $370 million ($2.00 ticket, net of taxes and present value calculation done above)...  So, the government STILL WINS!

"America, what a great country!" -- "Moe", my Iranian-American accountant friend in Virginia

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If any of you are in a Powerball state, there will be many places offering up the winning numbers early Thursday, but here is the one I will be checking:

flalottery.com

Good Luck to any other players out there!