The $2.04 billion Powerball jackpot ticket was sold in California, making the ticket holder winner of the largest prize ever.
The odds of winning are small, about 1 in 292 million. You are about 400 times more likely to be hit by lightning. If every adult in the United States purchased one ticket, there would be an 11% chance that no winner would emerge. But once a winner is declared and claims the prize, a more interesting question arises: What happens to all that Powerball Jackpot money and the supposedly lucky ticket holder? As research shows, it’s often not what you’d expect.
A Smaller Prize Than It Seems
While the Powerball Jackpot is eye-watering large, the actual payout will be much less. As a single winner, he, or she, can choose a lump sum payment that amounts to about $756 million or $1.5 billion worth of annual payments that get progressively higher over 30 years.
After that, the taxman gets to take a big bite. The federal government will take about a quarter of a billion dollars, leaving $470 million if it’s a lump sum payment. And then, the state where the winner resides will take another bite unless the winner lives in Florida, Texas, or another state without an income tax. That jackpot is starting to look smaller, though it’s still a massive chunk of change.
Where Windfalls Go
The conventional wisdom is that winning the lottery will change your life. While that’s probably always true, research suggests that it’s not always going to change in the way you might hope. Economists Guido Imbens, Bruce Sacerdote, and statistician Donald Rubin showed in a 2001 paper that people tend to spend unexpected windfalls. A look at lottery winners approximately ten years after they won found they saved just 16 cents of every dollar won.
In my research, I found that the average person in their 20s, 30s, or 40s who was given an inheritance or big financial gift quickly lost half the money through spending or poor investments. And other studies have found that winning the lottery generally didn’t help financially distressed people escape their troubles and instead postponed the inevitable bankruptcy. One-third of lottery winners eventually go bankrupt.
It’s Not Easy To Blow It All
So how could a Powerball Jackpot lottery winner blow through hundreds of millions of dollars so quickly? It’s not easy. Demographic research on lottery players’ characteristics shows that lottery playing peaks when people are in their 30s and falls as people get older. And the average female in the United States lives to age 80.5, and the average male to 75.1.
So that means, assuming the winner is in her 30s, she would have about 45 years or so to spend the lump-after-tax sum of, let’s say, $470 million. That means she would have to pay over $10 million a year, or roughly $29,000 per day, to burn through it all – even more when you factor in interest accrued while it sits in the bank.
In addition, blowing it all means the winner has no assets to show for it. If she uses the money to buy luxury homes, Banksy paintings, and Aston Martins, her net worth wouldn’t change, and she’d be able to retire with her wealth intact – assuming the investments kept their value or rose.
Blowing through the money, which leads to bankruptcy and low savings rates, means the winner has nothing to show for her spending besides a good time, plus goodwill from friends and relatives who went along for the ride.
Riches To Rags
And that’s basically what a man named Huntington Hartford did. Hartford, who lived from 1911 to 2008, was the heir to the Great Atlantic & Pacific Tea Company fortune. This company, which started just before the Civil War, is better known as the A&P supermarket chain. A&P was the first United States coast-to-coast food store, and from World War I to the 1960s, it was what Walmart is for today’s American shoppers.
Hartford inherited approximately $90 million when he was 12. Adjusting for inflation means he was given about $1.6 billion as a child after taxes. Yet Huntington declared bankruptcy in New York in 1992, approximately 70 years after being handed one of the most considerable fortunes in the world.
Hartford had the reverse Midas touch. He lost millions in buying real estate, creating an art museum, and sponsoring theaters and shows. He combined poor business skills with an exceptionally lavish lifestyle. After declaring bankruptcy, he lived solitarily with a daughter in the Bahamas until he died.
May The Odds Be In Your Favor
Hartford’s story, and additional academic research, reveal that coming into a windfall of cash doesn’t always have a happy ending. Squandering that money is easier than it seems.
If you are planning on playing, I wish you good luck. If you are planning on winning, I wish you even more luck.
Nevertheless, one key lesson is that when you get a windfall or win the lottery, plan and resist the all-too-human temptation to spend all the money.
