HolyCoast: Today's Math Lesson

Friday, March 30, 2012

Today's Math Lesson

The old saying goes "The lottery is a tax on people who are bad at math." Well, here's some math for you:
  • Odds of winning tonight's $640 million MegaMillions lottery:  1 in 176,000,000
  • Odds of winning if you don't buy a ticket:  0
  • Odds that someone will win this one:  Pretty good.  Some people who never play will be buying tickets, and others who do will be buying more than they usually do.  Chances are we could end up with several winners.
However, I don't plan to split the money with anybody.

Now, let's talk a little Obamanomics about this prize pool.  The winner (me) will have two choices in payouts - $640 million in installments over 26 years (over $24.6 million per year), or a one-time cash payout estimated at $460 million (that's the amount the annuity used to pay the prize is worth today).  No one in their right mind will take the 26 installments for three reasons:
  • Greed/instant gratification
  • Nobody is guaranteed to outlive the payments
  • Tax Rates
Regarding taxes, tax rates today are lower than they may ever be again in the foreseeable future.  Obama wants the Bush tax rates to expire, and that will jack up the rates on all levels of income.  Secondly, he never misses an opportunity to talk about adding higher taxes to the rich, so you know that given the sorry financial state of the country he's likely to get his way and people with big incomes will be having more of it confiscated by the government.

Currently lottery winnings are not taxable in California and many other states where the game is played.  I expect that will change as cash-strapped states look for more money.  There goes another chunk of that 26-year payout.

After taxes the winner (me) who takes the cash payout will be looking at about $276 million free and clear.  I can live on that.  What would be really fun is to stick it all in something that pays only tax-free income and never pay the government another dime in federal and state taxes.  In fact, you might even qualify for tax credits under our screwy system.  Let them send you money for a change.  Wouldn't that be rich!

Oh, and think about this.  Lottery officials say that have no idea how high this thing will be next week if nobody wins tonight - possibly over $1 billion.  You think there's a lottery frenzy now....

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