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Lottery 101

Exciting Hobby or Voluntary Tax?
Posted: 8:54 PM, Jan 15, 2016
Updated: 2016-01-15 21:54:44-05
Lottery 101

Come on, admit it. You can’t resist buying the occasional lottery ticket and dreaming of what you would do with hundreds of millions of dollars. Given the recent Powerball frenzy and that lottery sales in the US for fiscal 2014 topped $70 billion, you are certainly not alone. That’s more than we spent on sports tickets, books, video games, movie tickets, and music… combined!

As you buy your ticket, here a few thoughts to consider.

Odds of Winning – People sometimes think the odds of winning are related to the number of players, but that simply is not true. All that does is slightly change the likelihood that you will share the payout.

The payout amount changes with the number of tickets sold, but the odds depend on the number of numbers that have to be chosen. It is simply a matter of summing up all the possible combinations.

Let’s take an example of a Pick 4 game with four numbers chosen from one to ten, independently. Your chances of getting any one number right are one out of ten. Your chances of getting them all right are the odds of all the individual number choices multiplied together. In this simple case, it is 1/10 x 1/10 x 1/10 x 1/10, or 1 in 10,000.

Games like Powerball and Mega Millions are combination games, where the order is not important. The odds are calculated in a similar fashion, with one less number available for each drawing. For example if there are 56 numbers, the odds of getting the first number drawn are 1 in 56, for the next number it is 1 in 55, and so on. Based on exactly selecting 5 numbers from a set of 69 white balls and one number from 26 red balls, the odds of winning the Powerball are close to 1 in 292.2 million.

Payout – For grand prizes, you have the choice of a lump sum payment or a 30-year inflation-adjusted annuity. The listed jackpot amounts assume an annuity, which is the actual size of the pot (the lump sum prize) plus the future value spread out over the 30 annual payments.

In general, if you take the lump sum over the annuity, you are betting that you will invest the money and get a better return than the annuity will pay (which is a reasonable bet with today’s low interest rates). On the other hand, you may not care and just want to blow your winnings on frivolous items immediately – which is why the annuity is the better option for some winners.

The best piece of advice we can give you is to find a trustworthy financial advisor to determine the best choice for your situation. Your brother-in-law doesn’t count – unless he really is a professional financial advisor.

Allocation – Aside from the payout, where does the money go? That depends on your state legislature and the distribution rules they have set up. Money stays in state, even for nationally distributed games such as Powerball – they operate as part of your state lottery.

Many states send the majority of funds to education after payouts and overhead costs, although state legislatures have diverted some components of it for specific purposes. The Powerball website lists examples of economic development in Kansas, property tax relief in Wisconsin and natural resources in Minnesota. Check your state lottery website for an explanation of where the funds go where you live.

Even if the funds are slated for a specific purpose, keep in mind that does not necessarily mean an increase. For example, your state may budget a certain amount for education and replace a portion of that with the lottery funds, sending that money to be spent elsewhere.

Methods – The lottery is truly random, and your picks should be as well. There is no harm in playing the same number every time – but if you do, psychologically you should stick with it. Imagine if your favorite numbers came up the one time you switched. (“Honey, please pass me the cyanide.”)

Some try to analyze past results to see if the random assumption may be flawed – in other words, if there is some external reason why one ball may be more easily chosen or excluded. This is futile – don’t fall for it. Besides, if anyone did come up with a verifiable difference, they are not going to tell you – they are going to use this advantage for themselves.

The Very Real Hazard of Compulsive Gambling – Everyone knows about the danger of alcoholism or the lure of drug addiction (getting physically addicted to prescribed or illegal drugs that offer a temporary sense of euphoria or pain relief). However, it is also possible to be “hooked” on an activity like gambling or sex. These are called “process addictions,” and they are a form of compulsive behavior that can be as harmful as any substance addiction like heroin or barbiturates. Consequently, people who find that they cannot easily control their involvement with any form of gambling — from visiting a Las Vegas casino to buying $1 lottery tickets — need to seek professional help. Sadly, millions of Americans suffer from an addiction to gambling. And while buying a $1 lottery ticket seems like a small and innocent act, if it is part of a broader pattern of compulsive gambling, it can be life ruining. Therefore, it is important to understand that for some people, the only acceptable level of gambling is no gambling at all.

To answer the question in the title – the lottery really can be both an exciting hobby and a voluntary tax that can contribute to social programs, especially if done with a sense of fun and self-control. Try to think of it as a tax where you could receive a refund in the millions of dollars. The odds of that happening from the IRS are worse than your odds of winning the lottery. Good luck!

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