How Winning the $1.5 Billion Powerball Jackpot Could Still Lead to Bankruptcy
(THE CONVERSATION) The last power ball jackpot inflated to US$1.5 billion on November 2, 2022 – just below the record amount – 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 $1.54 billion Mega Millions in 2018.
The odds of winning are very small, about 1 in 292 million. You are about to 400 times more likely to be struck by lightning. Whether 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 larger.
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 search by me and other shows, it’s 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 gradually increase over the years. 30 years.
After that, the IRS takes a big bite out of it. The federal government will take around 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 shown in a 2001 article that people tend to spend on unexpected bargains. 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 was received an inheritance or a large financial gift quickly lost half of the money due to expenses or bad investments.
And other studies to have found that winning the lottery usually did not help people in financial difficulty to escape their problems and only postponed the inevitable bankruptcy. one found 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 game picks when people are in their thirties and falls as people get older. And the average woman in the United States lives up to 80.5 years and the average human lives up to 75.1 years.
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, Banksy paintings and Ferraris and Aston Martins, her net worth wouldn’t actually change and she could retire with her wealth intact — assuming the investments hold their value or grow.
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.
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 from coast to coast, and from World War I to the 1960s, that’s what walmart is for today’s American shoppers.
Hartford inherited about 90 million dollars when he was 12 years old. Inflation adjustment means he received approximately $1.6 billion child, after taxes. Yet Huntington declared bankruptcy in New York in 1992, some 70 years after receiving one of the world’s greatest 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 a first article published on January 12, 2016.
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