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Post: Brett Arends’s ROI: No, at $1.9 billion the Powerball still isn’t a great deal

Moe, Larry and Curly’s latest brilliant idea to retire in luxury is to buy as many Powerball tickets as they can ahead of tonight’s drawing.

“Look,” says Moe, as he explains the theory to me over a coffee. “The jackpot’s up to $1.9 billion, right?”

“OK,” I say. 

“And each ticket gives you a 1 in 292 million chance of winning?” he adds.

I agree that’s what the website says.

Read: When is the next Powerball drawing, and what are the odds of winning $1.9 billion?

“So do the math!” says Larry, butting in. “A 1 in 292 million chance of winning $1.9 billion should be worth $6.50, right?”

I say I got his math. If you divide $1.9 billion by 292 million you get $6.50.

“But a ticket only costs you $2,” says Curly. “So you’re making a profit! A ticket costs you less than a third of what it’s worth!”

OK, I say. But so what? That’s a profit of $4. You’re not going to retire on $4.

“No,” says Moe impatiently. “We’re not going to buy one ticket. We’re going to buy hundreds. Thousands!”

Larry adds, “If only we knew a hedge-fund manager, we’d have it made!”

Why, I ask?

Want some real retirement advice? Read MarketWatch Retirement

“Simple,” he replies. “We’d buy 292 million tickets. One for each possible winning number. That would cost us…” (he quickly does the math on his fingers) “$584 million. And then we’d be guaranteed to win $1.9 billion! That’s a $1.3 billion profit!”

Curly looks up from his HP12C financial calculator. “That’s a 225% return on investment!” he says. “Take that, inflation!”


I hate to burst their bubble, but I have no choice.

“Look, guys,” I say. “I’ve got some bad news for you. First, the jackpot isn’t really $1.9 billion. That’s just the sum total of the payouts over 30 years.”

“OK, so we have to wait for the money,” says Moe.

“No,” I reply, “it’s worse than that. The Multi-State Lottery Association tells me the first payout is only $28 million. Then it goes up 5% every year, till it ends around $110 million in 2052. Meanwhile, inflation is eroding the value. Already dollars are losing their purchasing power at 8% a year. Last year’s dollar will buy only 92 cents worth of stuff today.”

“So what are you saying?” asks an irritated Larry.

“I’m saying that the jackpot isn’t really worth $1.9 billion. Even over 30 years. Not in real money. Let’s do the math. Technically, if you win the jackpot, your second year’s payment will be just over $29 million. But inflation is running at 8% a year. So next year’s payment will actually be worth less than $26 million in today’s terms. In 10 years’ time, after 10 increases of 5% each, you’ll get a $43 million payment. But it will buy you only $14 million worth of stuff in today’s terms, because prices will have risen by 8% a year. You’ll have $43 million, but the average new car will cost more than $100,000 and you’ll be paying $4 for a can of chicken noodle soup.”

I do some quick sums. “If you add it all up,” I say, if inflation stays at 8% for 30 years that $1.9 billion will only be worth about $365 million in today’s money. And you’ll have to wait a long time for a lot of it, too.”

“But inflation’s not going to stay at 8%, is it,” says Curly, who has great respect for Federal Reserve chairman Jerome Powell and believes what he says.

“Maybe not,” I reply. “But even if inflation falls to 3% a year for the next 30 years, I say, that supposed $1.9 billion will still only get you $565 million in today’s money. That’s actually less than the cost, today, of buying enough lottery tickets to cover all the numbers.”

And there’s another problem, I say.

“What’s that?” asks Larry.

“Taxes,” I reply. 

“Wait,” says Moe. “The government sells us a lottery ticket and if we win they take money back?”

Of course, I reply. (And no, I add, you can’t deduct the money you lose on the lottery from your income taxes — though you can deduct it from the winnings, for what that’s worth.)

If Moe, Larry and Curly won the jackpot they’d be paying the top rate of federal tax on their payouts, 37%, plus any state taxes as well.

So when you factor in 3% inflation and taxes, that so-called “$1.9 billion” jackpot will actually only net you about $360 million in today’s money over the next 30 years, I say.

And that’s assuming inflation falls to 3% and stays there, I add. If it stays at 8%, you’ll only get back barely $200 million in today’s prices.

Never mind the impossibility of buying all the numbers.

They looked crestfallen. I added, “Look at this another way. The Powerball also offers a single, upfront payout of $930 million instead of 30 years’ payments. If you deduct 37% federal tax from that, you’re looking at $585 million net, right now. In other words, if you bought all the tickets, took the cash and paid federal taxes you’d get back pretty much exactly what you paid.”

They were so downhearted, I didn’t want to add yet another issue: You could end up winning the jackpot, but having to share it with one, two or even more other people.

So, no, Moe, Larry and Curly, I’m sorry to say that buying up lots of lottery tickets isn’t the path to an early retirement you might have thought.

Sure, $2 buys you a 1 in 292 million chance of winning $1.9 billion. In theory. But the reality works out pretty different.

OK, so if you take the upfront crash then, even after taxes, the ticket is worth roughly $2. So buying a ticket today isn’t particularly stupid. It just isn’t a deal.

Meanwhile, and maybe more to the point: If the Powerball is a mediocre bet even when the jackpot is at an unprecedented level, why would anyone play it the rest of the time?

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