The Mathematics of Winning Lotteries
How to Protect Your Winnings
Whether it is $100 or $100 million, winning is great. As the number increases, though, so do the complications. No one is going to come asking for a share if you’ve just won $5,000 but punch that number up to some of the fantastic jackpots that are now up for grabs and it becomes a whole other matter. There are a bunch of things that people have to consider including their ability to manage money as well, how they are going to manage the news. Most lotteries require the name of big jackpot winners to be published, so it’s hard to get around that one. But there are steps you can take to protect yourself and your winnings.
Financial Decisions on Winning Lotteries
STOP! Don’t rush out the door to buy that Lamborghini or hire that jet to whisk you away to some private tropical isle in the Pacific. Sit down and take more than a moment to think about your choices and decisions. Think about how you are going to address the demands of family, friends, neighbors, and charities. They are all going to knocking on your door. Decide how you are going to handle this before you cash that check!
Where’s My Share of the Lottery Win
It’s incredible the people that feel they deserve a share of your big jackpot. The pressure that comes to bear on winners is impressive. The larger the perceived win, the bigger the pressure – I mean why won’t you share? Some people get into education trusts for their family but where do you draw the line. What happens when one of your kids has more children? How do you stop different family members from running up debts because they think they are going to get a share? Make sure you have worked through any decisions you are going to make about your big win!
Years ago, I remembered a local family winning a lottery. It was only $100,000 (tax-free) but split between 10 family members. There ensued a massive argument about who should get what percentage as two of the members hadn’t paid their share for a couple of weeks. It ended up with two of the branches of the family not talking for months. Whether it is $100,000 or $100 million, it is essential to be clear who owns a group ticket and what their terms are – who gets an official share!
Protecting Your Lottery Win
Business Insider ran a list of lottery players who won the big jackpot and then lost it through various means. This included not declaring a win as part of a divorce, ransom issues over a kidnapping, excessive gambling and taking that fantastic trip to come home to nothing. Then there are the charities that will go after their share, the scammers that use your name (look at what happened to the couple in Nova Scotia) and friends that suddenly are BFFs. It is remarkable how many big winners end up with nothing in a matter of years.
Lottery Wins – Annuity or Lump Sum
Many of the big international lotteries are based on annuity payments ranging between 25 and 30 years. This means that if the lump sum option is taken, the jackpot works out to be about half of the original advertised amount. In some ways, an annuity makes sense as it provides income over a bunch of years, but let’s look at what that means.
Take the mega jackpot in mid-October for US Powerball. The advertised jackpot was $156,000,000 with the lump sum of $89,200,000. Let’s use Florida that has no state withholding tax.
|Annuity – 30 Years||Lump Sum|
|Less 25% Tax||$39,000,000||$22,300,000|
Overall, that means that the actual value over 30 years is less with the lump sum though there is the benefit of having all the money at one time.
|Annuity – 30 Years||Lump Sum|
|Divided by 30 Years||30||30|
The other thing about the annuity payments is that they wouldn’t be the flat $3,900,000 but start at a lesser value (say around $2,086,000 net) increasing during the 30 years (around $6,505,886 net). The annuity decreases the options on a big win, and how it’s going to be spent at the same time, it does allow a winner to make mistakes and still have money next year!
Tax or No Tax on Lotteries
Though US lotteries are attracting a lot of attention with their vast jackpots, they are taxed. Firstly, there is the state tax ranging of no tax (California) up to 8.5% (Washington DC). Don’t forget that this is on top of the federal tax of 25% for national and 30% for international players. Other lotteries internationally offer tax-free lotteries though it’s hard to compare to some of the jackpots that climb for the US Powerball and Mega Millions.
Winning a Lottery
Whatever lottery games you chose to play, whether they are US based or in another country, make sure you understand what it means to win. It’s fun to think about what would be the first thing you’d do. Me, I’d get a nice glass of red wine and sit down and think about it before I claim that ticket. Make sure you’ve done your math on any great lottery win!
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