How Winning the $1.5 Billion Powerball Jackpot Could Still Lead to Bankruptcy

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Jay L. Zagorsky, Boston University

(THE CONVERSATION) The last Powerball jackpot reached US$1.5 billion on November 2, 2022 – just short of the all-time high – after another draw passed without a winning ticket. The next draw will take place on November 5.

The prize is now the third biggest lottery the world has ever seen, behind a $1.6 billion Powerball jackpot in 2016 and a $1.54 billion Mega Millions in 2018.

The odds of winning are very low, around 1 in 292 million. You are about 400 times more likely to be struck by lightning. If every adult in the United States bought a single ticket, each with a different number, there would still be a good chance – around 11% – that no winner would emerge in any given draw and the pot would grow even bigger.

But once a winner is declared and claims the prize, a more interesting question arises: what happens to all that money and the supposedly lucky ticket holder? As my research and that of others shows, this is often not what you expect.

A smaller price than it looks

The first thing to keep in mind is that even though the jackpot is huge, the actual payout will be much less.

If someone claims it, the winner wouldn’t get $1.5 billion in one big check. As a single winner, he or she can either choose a lump sum payment that amounts to approximately $756 million or receive $1.5 billion in annual payments that increase gradually over 30 years.

After that, the IRS takes a big bite out of it. The federal government will take about a quarter of a billion dollars, leaving $470 million if it’s a lump sum payment. And then the state the winner resides in will take another bite, unless the winner lives in Florida, Texas, or another state with no income tax.

This jackpot is starting to look much smaller, although this is still a huge change.

Where do the deals go

Conventional wisdom is that winning the lottery will change your life. While that’s probably always true, research suggests it won’t always change as you might hope.

Economists Guido Imbens and Bruce Sacerdote and statistician Donald Rubin showed in a 2001 article that people tend to spend unexpected windfalls. A look at lottery winners about 10 years after winning revealed that they only saved 16 cents on every dollar won.

In my own research, I found that the average person in their 20s, 30s, or 40s who received a large inheritance or financial gift quickly lost half the money by spending or investing poorly.

And other studies have shown that winning the lottery generally does not help people in financial difficulty to escape their problems and only postpones the inevitable bankruptcy. One of them revealed that a third of lottery winners end up going bankrupt.

It’s not easy to blow it all up

So how exactly could a lottery winner spend hundreds of millions of dollars so quickly? It is not easy.

Demographic research on the characteristics of lottery players shows that lottery play peaks when people are in their 30s and declines as people age. And the average woman in the United States lives to be 80.5 and the average man to be 75.1.

So that means that, assuming the winner is in her 30s, she would have about 45 years to spend the after-tax lump sum of, say, $470 million. That means she’d have to spend just over $10 million a year, or about $29,000 a day, to spend it all — even more when you factor in interest accrued while it’s in the bank.

Plus, really messing it all up means the winner has no trumps to show for it. If she uses the money to buy luxury homes, paintings by Banksy, Ferraris and Aston Martins, her net worth won’t actually change and she can retire with her wealth intact – assuming the investments hold their own. value or increase.

Blowing up the cash, which leads to bankruptcy and low savings rates, means the winner has nothing to show for her spending but a good time, plus the goodwill of friends and family. parents who accompanied her.

Ragged riches

And that’s basically what a man named Huntington Hartford did.

Hartford, who lived from 1911 to 2008, was heir to the Great Atlantic & Pacific Tea Company fortune. This business, which began just before the Civil War, is better known as the A&P supermarket chain. A&P was America’s first grocery store coast to coast, and from World War I to the 1960s, it was what Walmart is to American shoppers today.

Hartford inherited approximately $90 million when he was 12 years old. Adjusting for inflation means he received about $1.6 billion as a child, after taxes. Yet Huntington declared bankruptcy in New York in 1992, some 70 years after receiving one of the world’s largest fortunes.

Hartford had the Midas touch reversed. He lost millions buying up real estate, establishing an art museum, and sponsoring theaters and shows. He combined poor business skills with an exceptionally lavish lifestyle. After declaring bankruptcy, he lived in seclusion with a daughter in the Bahamas until his death.

May the odds always be in your favor

Hartford’s life story, coupled with academic research, shows that a windfall of money doesn’t always have a happy ending. Wasting that money is easier than it looks.

If you intend to play, I wish you good luck. If you are planning to win, I wish you even more luck.

Nonetheless, a key lesson, whether you play or not, is that when you get a bargain or win the lottery, plan ahead and resist the all-too-human temptation to spend all the money.

This is an updated version of an article first published on January 12, 2016.

This article is republished from The Conversation under a Creative Commons license. Read the original article here: https://theconversation.com/how-winning-1-5-billion-powerball-jackpot-could-still-lead-to-bankruptcy-193921.

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