SHOCKING STAT: The odds are that the US$1.5 billion Powerball winner will end up bankrupt
The U.S. Powerball lottery is holding a drawing this week for a jackpot that’s already reached US$1.5 billion. That’s after the 18 drawings held since November failed to yield a winner, causing the grand prize to swell to this record sum.
This jackpot is drawing such attention that more people are buying tickets, and even the lottery’s own projections are changing rapidly. During the weekend the payout was an estimated US$1.3 billion. Monday it was revised to US$1.4 billion and on Tuesday it hit US$1.5 billion.
That makes it the largest lottery grand prize the world has ever seen, even compared with the “El Gordo” lottery in Spain, which in December awarded a larger cache of prizes ($2.4 billion) but spread it among thousands of winners.
The odds of winning this huge sum of money on January 13 are very small (1 in 292 million). You are 250 times more likely to be hit by lightning. If every adult in the U.S. purchased just one ticket, each with a different number, there would still be a good chance (about 15 percent) that no winner would arise and the pot would grow even larger.
On Wednesday night, however, a winner is actually very likely, since many lottery players are not limiting themselves to a single ticket and the massive prize is luring hordes of Americans to try their luck, along with – reportedly – thousands of Canadians.
Once a winner is declared a more interesting question arises: what happens to all that money and the lucky ticket holder(s)?
Fortunately for us, academia has a lot to say about it.
A smaller prize than it seems
Most of the academic research has dealt with smaller lottery prizes and inheritances, since there are relatively few giant jackpot winners. But while the US$1.5 billion jackpot is eye-wateringly large, the actual payout will be much less.
Wednesday night’s winner or winners will not actually receive US$1.5 billion. Assuming just one person wins it, he or she can either choose a lump sum payment that amounts to about $930 million or will have to wait 30 years for all the payments to accrue.
And then there’s the taxman’s big bite. Forbes estimates that a single winner in a low-tax state, like Florida, who elects to take all the money in one lump sum instead of in 30 payments will get a check for about a half-billion dollars.
That jackpot is starting to look a lot smaller, though it’s still a fair chunk of change.
What happens to windfalls
Previous research suggests many people quickly spend any unexpected windfalls. A 2001 paper (by economists Guido Imbens and Bruce Sacerdote and statistician Donald Rubin) found that lottery winners saved just 16 cents of every dollar won.
Other studies found that instead of getting people out of financial trouble, winning the lottery got people into more trouble, since bankruptcy rates soared for lottery winnersthree to five years after winning.
It is not only winning the lottery that causes people to spend. My own research found that the average person in their 20’s, 30’s and 40’s who was given an inheritance or large financial gift quickly lost half the money through spending or poor investments.
Overall, research shows lottery winners and people getting windfalls spend or blow through much of the money. Nevertheless, lottery sales in the U.S. have increased dramatically since their introduction in the 1970s.
Blowing it all
So how exactly does a lottery winner blow
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