The Lottery: Is It Ever Worth Playing?

When it comes to the lottery, no matter which game you play, your odds of winning are vanishingly small. For example, the odds of claiming the jackpot in a Powerball drawing are one in 292.2 million. To put this in perspective, you have a:

• One in 186,978 chance of death or injury from a lightning strike in a given year
• One in 46,744 chance of dying from a hornet, wasp, or bee sting during your lifetime
• One in 27,925 lifetime chance of dying in a cataclysmic storm.

Most people would agree the likelihood they will suffer any of these misfortunes is pretty minuscule.  

Let's look at it another way. Assume you went to the largest stadium in the world—which happens to be in North Korea. Imagine the stadium was filled to capacity and everyone inside was entered in a lottery with a single winner. In that case, your odds of winning would be 1 in 150,000.

Would you be sitting on the edge of your seat in that stadium as they were announcing the winner? To equal the odds of winning the Powerball jackpot, you would have to fill that same stadium to capacity 1,947 more times, put all of those people together, and have the same drawing with a single winner.

Still not convinced that a life-changing win is an exceedingly long shot? If they were giving away a new home to just one person in the six most populous states in the United States, the likelihood of winning would be more than twice as high as for the top Powerball prize.

Games Lotteries Play

The odds of winning any of Powerball's prizes, which start as low as $4, with a single ticket are 1 in 24.9. One thing the lottery's site fails to mention is that if you do win a Powerball prize, the odds it will be the minimum $4 prize are excellent, at more than 9 in 10.

If you'd like to check that math, start with the total of 292,201,338 possible Powerball number combinations. Using the winning probabilities the lottery provides, there are 11,746,494 possible prize-winning combinations, including 7,623,532 matching the Powerball but none of the five white balls and 3,176,229 matching the Powerball and one of the white balls, all of which pay $4. That's a total of 10,799,761 possible winning combinations for the minimum prize. Divide that number by the 11,746,494 total winning combinations, and you get a 91.9% probability your winning ticket won't return even $5.

The odds of winning something were lower and those of claiming at least a share of the Powerball jackpot were significantly better before the Multi-State Lottery Association, which runs the game on behalf of 38 U.S. states and territories, changed the rules in 2015, increasing the number of white balls from 59 to 69 while lowering the number of Powerballs from 35 to 26.

“Powerball has been revamped seven other times in its 23-year history so that the game can continue to be attractive to players by delivering the big jackpots that players want, and these new changes will do just that," the executive director of the Texas Lottery said ahead of the changes.

Not to be outdone, Mega Millions, a rival lottery game run by a consortium of 11 U.S. states, changed its rules for the third time in 21 years in 2017 to make hitting the jackpot harder.

Super-sized jackpots drive lottery sales, not least because they earn the games a windfall of free publicity on news sites and newscasts. And the way to ensure they grow to apparently newsworthy amounts more often is to make it harder to win the top prize. That makes it more likely it will carry over to the next drawing, increasing the stakes and public interest.

Independent Probability

Of course, someone has to win the jackpot. But don't let that certainty cloud your judgment. The rules of probability dictate you do not increase your lottery odds by playing more frequently, nor by betting larger amounts on each drawing. Each lottery ticket has the same odds of winning no matter how many you buy. Each one has independent probability not altered by the frequency of play or how many other tickets you bought for the same drawing.

Buying more tickets certainly increases the overall likelihood of claiming a prize of some sort, even if it's extremely likely to end up below what you spent on the tickets. Spending $1,000 on Mega Millions tickets carries a nearly 50% probability of getting back $64 or less, a nearly 90% chance the prizes won won't total more than $92, and a 99% likelihood they won't top $554.

When the jackpots carry over and grow in size, those who buy tickets to the latest drawing can hope to claim some of the money spent by the luckless players on the prior ones. That may initially improve the expected return on a ticket, but as the higher jackpots and attendant publicity draw other players, the increased likelihood of having to share a jackpot, if you win, can lower expected returns below those on much lower jackpots.

Keep in mind that lottery game prizes account for only 50% of ticket receipts, like the Powerball.

Who Plays the Lottery?

Although the chances of winning the lottery are exceedingly low, that doesn't stop people from playing. U.S. adults spend approximately $338 per person annually on lottery tickets, on average, in 2023. When a state lottery was introduced in Texas, the number of adults who gambled increased by almost 40%.

Typically, a small minority of heavy players provides most lottery revenue. A Minnesota study found 20% of lottery players accounted for 71% of lottery receipts, while in Pennsylvania 29% of players accounted for 79% of lottery revenue.

For some, the lottery is just one of those fun things that we do, a chance to fantasize about winning a fortune at the cost of a couple of bucks. But for others—often those with the least amount of money to spare—playing for these jackpots can become a real budget drain. Numerous studies have found those with low incomes make up a disproportionate share of lottery players. Small wonder critics say lottery games are a disguised tax on those least able to afford it.

Gambling vs. Investing

A curious headline appeared on the homepage of the Mega Millions lottery game in 2011. "Save for Retirement," it read. Anti-gambling groups cried foul at this apparent attempt to spin playing the lottery as a retirement plan; lottery officials said the promotional campaign was encouraging players to dream about how they would use their winnings—not offering a financial strategy.

Is there a better, more profitable, use for money spent on the lottery? Let's look at the numbers. Spending $5 per week on lottery tickets adds up to $260 per year. Over 20 years (a typical long-term investment horizon for stocks and bonds), the total spent on lottery tickets would be $5,200. Putting $260 per year into stocks (and assuming annual returns of about 7% based on equities' historical performance) would leave you with $11,015 after 20 years. But if you just spent the money on lottery tickets you'd only be left with your (likely negligible) prizes won.

Of course, the stock market is never a sure thing. Stocks can decline in value as well as appreciate. So let's try a more cautious estimate. Consider someone who contributed $250 annually to an individual retirement account (IRA) instead of spending that money on lottery tickets. After 30 years, and assuming a conservative average annual return of 4%, the account would be worth $15,392; after 40 years that number would jump to more than $25,000. And that's before considering the tax savings from the tax-deductible IRA contributions.

Lump Sum or Annuity?

Let's say, despite the dismal odds, you do win the lottery and win big—seven figures big. You're going to face a lot of decisions, and the first one is how to receive the funds. Most lotteries offer such winners a choice between a lump sum payout and an annuity.

The lump sum is a single payment of the prize won, after taxes, while the annuity spreads payments over 20 or 30 years. Unlike some annuities that only pay out until the owner's death, those for lottery jackpots are an annuity certain: the payouts continue for a set number of years, and you may bequeath them to heirs in your will. So which should you take?

The Case for Lump Sum Payment

Most lottery winners opt for a lump sum payment. They want all of the money right away. That is the main advantage of a lump sum: full and complete access to the entirety of the prize, after taxes. Taking a lump sum would certainly make sense for a winner without heirs or the expectation of living long enough to collect decades of annuity payouts.

Tax Advantage: Annuity

Advertised lottery jackpots are the sum of the aggregate annuity payments a sole winner would receive over decades; the immediate lump sum payouts offered as an alternative are significantly smaller. For example, the lump sum payout for a $1.025 billion Mega Millions jackpot in July 2022 was $602.5 million.

You may be in a better income tax position if you receive the proceeds as an annuity rather than up front. Why? Lottery winnings are subject to income tax (both federal and state, except for the few states that don't tax winnings) in the year you receive the money.

Say you win a $10 million prize. If you take the lump sum option, the entire sum is subject to income tax that year. However, if you choose the annuity option, the payments would be spread out over several decades, and so would the resulting tax bill.

Other Advantages to Annuities

But perhaps the biggest argument for taking the annuity is more intangible—to protect you from yourself. A seven-figure windfall is a life-changing event, and not always in a good way. Despite the frequently recounted tales of lottery winners who squandered their fortune, most end up richer and no less happy for it.

Still, a big windfall from gambling causes some people to lose perspective, and others may face pressure to share it with family and friends alongside dubious investment pitches.

An annuity minimizes such hazards. After all, you can't give away, squander, or otherwise mishandle what you don't have. Taking the money over time provides you with multiple chances to invest it wisely. Even if things go badly the first year, you will have many more chances to learn from mistakes, recoup losses, and handle your affairs better. 

Estate Planning for Lottery Winners

Taxes are generally withheld from lottery distributions at the time they are paid out. If the winner opts for a lump sum, it can usually be inherited tax-free since inheritances are rarely taxed. If the payments are still coming in from an annuity, taxes will be withheld.

As with other inherited assets, estate taxes may be owed if the estate's value exceeds the exclusion limit of $13.61 million in 2024 ($12.92 million in 2023). Since lottery winnings push many people into the high net worth category, estate taxes may be a factor. In some states, Powerball will convert annuities to lump sum payouts after the winner's death to help manage the resulting tax obligations.

The Bottom Line

Many people see purchasing lottery tickets as a low-risk investment. Where else can you "invest" $1 or $2 for the opportunity to win hundreds of millions of dollars? The risk-to-reward ratio is certainly appealing, even if the odds of winning are remarkably slight. But keep in mind that lottery players as a group contribute billions to government receipts they could instead be saving for retirement, or college tuition.

Even small purchases of a lottery ticket or two can add up to thousands in foregone savings over the long run, if those purchases turn into a habit.

In the unlikely event you ever do win the lottery, you will want to work with your financial advisor, tax attorney, or certified public accountant (CPA) to determine whether the lump sum payout or an annuity is best for you.

But if you really care about maximizing your wealth, the only winning move is not to play.