Mega Millions
April 2nd, 2012 at 1:25:28 PM
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I still haven't checked all of my tickets since I was in Vegas all weekend for a bachelor party. Since I know I didn't win the jackpot, here's hoping for that second prize!
So did anyone on the board win $150 or $10K? I figure we would have heard about the $10K by now..
So did anyone on the board win $150 or $10K? I figure we would have heard about the $10K by now..
"So drink gamble eat f***, because one day you will be dust." -ontariodealer
April 2nd, 2012 at 1:30:58 PM
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But if I report my $100,000 win here , someone might tell my wife. !!
April 2nd, 2012 at 2:31:51 PM
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Quote: buzzpaffBut if I report my $100,000 win here , someone might tell my wife. !!
You joke, but there was a woman who hid a big
win from her husband and tried to divorce him
so she could have all the money. The judge ended
up awarding the whole win to the husband.
"It's not called gambling if the math is on your side."
April 2nd, 2012 at 2:57:12 PM
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I remember reading that story. At least one judge appears to be capable of independent thought.
April 3rd, 2012 at 10:42:22 PM
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Bob and I plan to discuss this on Thursday's radio show. In preparation, I wanted to calculate what the expected return of a ticket was.
With 651,915,940 tickets sold, and the chances of winning of 1 in 175,711,536, the expected number of winners was 3.71. That would average 172,499,821 per winner. Note that I'm dividing by expected winners, not actual winners.
Based on examples, at the Mega Millions web site, I show 58.7% will be left if selecting the lump sum. Most of that will be taxed at the 35% tax rate, leaving about 38.14% left, or about $65.8M per winner. Considering that, and the smaller prizes, the return on investment was 55.6%.
Maybe it will be a bit higher, because interest rates are low right now, allowing for a larger lump sum payoff. However, this does not include any state taxes.
When you factor in the utility of money, it becomes much worse.
I must say that I felt like Sheldon on the Big Bang Theory when I watched the news and saw just about everybody except me buying tickets. I just don't get why. Even my wife chipped in $20 when some of her friends made a California run to buy some. Sorry if this comes off as insulting to those on the site who bought tickets, but it seems like a mass heard mentality.
With 651,915,940 tickets sold, and the chances of winning of 1 in 175,711,536, the expected number of winners was 3.71. That would average 172,499,821 per winner. Note that I'm dividing by expected winners, not actual winners.
Based on examples, at the Mega Millions web site, I show 58.7% will be left if selecting the lump sum. Most of that will be taxed at the 35% tax rate, leaving about 38.14% left, or about $65.8M per winner. Considering that, and the smaller prizes, the return on investment was 55.6%.
Maybe it will be a bit higher, because interest rates are low right now, allowing for a larger lump sum payoff. However, this does not include any state taxes.
When you factor in the utility of money, it becomes much worse.
I must say that I felt like Sheldon on the Big Bang Theory when I watched the news and saw just about everybody except me buying tickets. I just don't get why. Even my wife chipped in $20 when some of her friends made a California run to buy some. Sorry if this comes off as insulting to those on the site who bought tickets, but it seems like a mass heard mentality.
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
April 3rd, 2012 at 10:55:21 PM
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if you google "psychology of lotteries" you can find some rather interesting reading.
there are many studies and many different explanations depending on income, education, family and culture,,,
i was going to post a link or two, but i keep finding more and more interesting articles!
there are many studies and many different explanations depending on income, education, family and culture,,,
i was going to post a link or two, but i keep finding more and more interesting articles!
In a bet, there is a fool and a thief.
- Proverb.
April 4th, 2012 at 12:39:10 AM
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Quote: WizardI must say that I felt like Sheldon on the Big Bang Theory when I watched the news and saw just about everybody except me buying tickets. I just don't get why. Even my wife chipped in $20 when some of her friends made a California run to buy some. Sorry if this comes off as insulting to those on the site who bought tickets, but it seems like a mass heard mentality.
It absolutely was mass heard mentality.
But the increase in ticket sales in Main should be contrasted by the increase in ticket sales by 10 in NJ, and NY. Now NJ and NY were buying a higher share of the tickets than population would indicate.
But what does it say about the recent federal ruling that lottery tickets can be sold online. Now the presence of convenience stores won't matter. What if lotteries don't have to pay the stores a portion of the winning ticket? What if they dispense with all the smaller prizes in favor of getting the jackpot as big as possible?
Is there any psychological difference between odds of 1 in a million and 1 in a 176 million? I don't think there is for most people. So they are simply drawn to the biggest possible jackpot.
The median number of tickets sold for the last 5 years was 20.5 million per drawing. The mega prize sold 1 billion for the last 4 drawings combined.
April 4th, 2012 at 1:09:45 AM
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keep in mind that the vast majority of lottery participants do not know, nor care about "the odds".
many people play regularly, but many more jump in at various thresholds.
i include myself in this, as i am guilty of buying a $1 ticket at the 300M level.
the most common excuse i have "heard" is, ironically: "you would be stupid NOT to"...
many people play regularly, but many more jump in at various thresholds.
i include myself in this, as i am guilty of buying a $1 ticket at the 300M level.
the most common excuse i have "heard" is, ironically: "you would be stupid NOT to"...
In a bet, there is a fool and a thief.
- Proverb.
April 4th, 2012 at 7:32:13 AM
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One excuse I've heard is, "My chances may be bad if I play the lottery, but they are zero if I don't."
Still, I think something else drives the craze when a jackpot reaches record levels. As I wrote before, I think it a heard mentality. There is contact high in being part of the heard. This can be easily seen at sporting events and more charismatic churches. Even the craps table is more fun because the players are winning and losing as a team. However, as someone who hates crowds, this is an effect I stand back from and see this effect from afar.
Still, I think something else drives the craze when a jackpot reaches record levels. As I wrote before, I think it a heard mentality. There is contact high in being part of the heard. This can be easily seen at sporting events and more charismatic churches. Even the craps table is more fun because the players are winning and losing as a team. However, as someone who hates crowds, this is an effect I stand back from and see this effect from afar.
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
April 4th, 2012 at 7:45:10 AM
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Yep, I "herd" about it, so I bought some tickets. :-)Quote: WizardAs I wrote before, I think it a heard mentality. There is contact high in being part of the heard.
April 4th, 2012 at 8:10:34 AM
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Quote: WizardOne excuse I've heard is, "My chances may be bad if I play the lottery, but they are zero if I don't."
As exuses go, that one at least is true. :)
Quote:Still, I think something else drives the craze when a jackpot reaches record levels. As I wrote before, I think it a heard mentality.
Partly. it's very much like a bubble, any kind of bubble. Just faster and more immediate in time. It's mostly driven by the media, as are all other bubbles. You hear so much about it, you figure you should take part (for the record, the first I heard about it was here). The only difference is that in other bubbles you hear that people are making money in tech stocks, gold, houses, what have you. In a lottery people aren't making money (except for the lotto agency and the sellers), but rather hope to win a boatload of money.
You'll notice there are no headlines about the drop in lottery sales after a big jackpot hits :)
Donald Trump is a fucking criminal
April 4th, 2012 at 8:34:43 AM
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Quote: WizardOne excuse I've heard is, "My chances may be bad if I play the lottery, but they are zero if I don't."
I haven't bought a lottery ticket in decades, and I bought one for my parents. It's certainly harmless fun, and you feel funny being left out of a national obsession. But these people who pooled their money to buy a 1000 tickets are crazy.
April 4th, 2012 at 8:38:22 AM
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Quote: NareedPartly. it's very much like a bubble, any kind of bubble. Just faster and more immediate in time. It's mostly driven by the media, as are all other bubbles. You hear so much about it, you figure you should take part (for the record, the first I heard about it was here). The only difference is that in other bubbles you hear that people are making money in tech stocks, gold, houses, what have you. In a lottery people aren't making money (except for the lotto agency and the sellers), but rather hope to win a boatload of money.
I'm mostly (or perhaps entirely) to blame since I started this thread, and probably sounded like an advertisement for the game.
I took part in the last drawing a lot more than I should have. The problem is this: it's a good bet mathematically (ignoring taxes and jackpot splitting), but it's effectively an all-or-nothing shot.
- Suppose there exists a game that costs $1 to play where you flip a fair coin fairly and if it comes up heads, you win 7-for-1. Would you play it?
- Suppose there exists a game that costs $1 to play where you roll a fair die fairly and if a 1 is rolled, you win 21-for-1. Would you play it?
- Suppose there exists a game that costs $1 to play where you roll a fair 175711536-sided die fairly and if a 1 is rolled, you win 640000000-for-1. Would you play it?
What is the cutoff? Why would 1 unit below it be acceptable, while 1 unit above it be unacceptable?
I am going to guess that most people will say yes to #1 and #2, no to #3, and offer nebulous answers to the questions in the last sentence.
April 4th, 2012 at 9:23:18 AM
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Quote: WizardOne excuse I've heard is, "My chances may be bad if I play the lottery, but they are zero if I don't."
Still, I think something else drives the craze when a jackpot reaches record levels. As I wrote before, I think it a heard mentality. There is contact high in being part of the heard. This can be easily seen at sporting events and more charismatic churches. Even the craps table is more fun because the players are winning and losing as a team. However, as someone who hates crowds, this is an effect I stand back from and see this effect from afar.
When people at work heard I bought tickets for the last two payouts, they thought I had gone crazy, since I'm very open in my disdain for lotteries. As JB pointed out though, when the odds are in the player's favor, why not go for the chance? I put $10 into each pool, for a total of $20. It will probably be my last foray into the lottery, unless it reaches epic levels.
For me, I had a lot of fun dreaming for a few days. In a job that can get monotonous, it provided me with a little satisfaction of what I would do with the money. It may seem silly, but that partly why I like to gamble; the dream of hitting it big. No, I won't get that $20 back, but I've spent $20 a lot faster in a casino where I didn't get half the satisfaction on that bet.
"One out of every four people are [morons]"- Kyle, South Park
April 4th, 2012 at 10:17:32 AM
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Quote: WizardSorry if this comes off as insulting to those on the site who bought tickets, but it seems like a mass heard mentality.
No offense taken :)
As to my results, I rather unwisely spent $160 on tickets for the big jackpot and won a whopping $7. Gosh darn it! I actually didn't check all of my tickets until last night. I knew I didn't win the jackpot since they didn't report a winner printed in my state, but I was really hoping for that second prize, or at least a $150 prize to almost cover my expenses.
Oh well, the tickets went into my "gambling records for taxes" file and will offset my winnings from the rest of the year. Again with the hubris of assuming I'll still be ahead at the end of the year.
"So drink gamble eat f***, because one day you will be dust." -ontariodealer
April 4th, 2012 at 10:50:14 AM
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I bought 1 ticket for $1. It was worth the $1 to give me something fun to think about on the 45 minute ride to and from work that day.
My wife put in $5 at a pool at work. Her office ended up buying about 1000 tickets total. That makes the odds of winning at least something I can comprehend. You don't want to be the sucker still at work when everyone else gets to retire.
My wife put in $5 at a pool at work. Her office ended up buying about 1000 tickets total. That makes the odds of winning at least something I can comprehend. You don't want to be the sucker still at work when everyone else gets to retire.
April 4th, 2012 at 11:17:21 AM
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buying 1000 tickets does not substantially reduce the odds.
if there are 176,000,000 million combinations and you have 1000 of them
that still leaves 175,999,000 combinations that you don't have covered
if there are 176,000,000 million combinations and you have 1000 of them
that still leaves 175,999,000 combinations that you don't have covered
In a bet, there is a fool and a thief.
- Proverb.
April 4th, 2012 at 11:26:37 AM
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Quote: WongBobuying 1000 tickets does not substantially reduce the odds.
if there are 176,000,000 million combinations and you have 1000 of them
that still leaves 175,999,000 combinations that you don't have covered
It makes the odds of winning 1:176,000. Just like buying 1,000,000 tickets makes the odds of winning 1:176.
"So as the clock ticked and the day passed, opportunity met preparation, and luck happened." - Maurice Clarett
April 4th, 2012 at 11:28:30 AM
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Quote: JB
- Suppose there exists a game that costs $1 to play where you flip a fair coin fairly and if it comes up heads, you win 7-for-1. Would you play it?
- Suppose there exists a game that costs $1 to play where you roll a fair die fairly and if a 1 is rolled, you win 21-for-1. Would you play it?
- Suppose there exists a game that costs $1 to play where you roll a fair 175711536-sided die fairly and if a 1 is rolled, you win 640000000-for-1. Would you play it?
I would, of course, play #1 and #2. #3 I would not, because the happiness of money is not proportional to the amount. I think that the utility of money can be closely approximate as log(money).
Let's say my wealth now is half a million. Then my happiness is log(500,000)=5.698970.
If I buy that lottery ticket, even without taxes or the annuity, my expected happiness will be (1/175711536)*log(500000+ 640000000-1) + (175711535/175711536)*log(500000-1) = 5.698969, which is 0.000001 less.
Quote: WongBobuying 1000 tickets does not substantially reduce the odds.
if there are 176,000,000 million combinations and you have 1000 of them
that still leaves 175,999,000 combinations that you don't have covered
What if someone offered to sell you 1,000 lottery tickets for $100. Would you take it?
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
April 4th, 2012 at 11:31:08 AM
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Wizard, did you just put a price on happiness?
;)
;)
Donald Trump is a fucking criminal
April 4th, 2012 at 11:36:14 AM
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Quote: NareedWizard, did you just put a price on happiness? ;)
Sure. I majored in math and economics in college. In my economics classes we often had to measure happiness, and did so using the log of the wealth.
Recently I read an article about trying to rank the happiness of various countries, and how to do it. I think a good starting point would be to average for each person log(wealth)*(time to enjoy it). This might, and should, give the US a low score because we generally work too much, which does not count towards the time to enjoy the money earned.
Sorry for going off topic a bit. I'll split this off it it gets more than a couple replies.
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
April 4th, 2012 at 11:52:50 AM
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Quote: WizardI think that the utility of money can be closely approximate as log(money).
Let's say my wealth now is half a million. Then my happiness is log(500,000)=5.698970.
If I buy that lottery ticket, even without taxes or the annuity, my expected happiness will be (1/175711536)*log(500000+ 640000000-1) + (175711535/175711536)*log(500000-1) = 5.698969, which is 0.000001 less.
The probability that I am happy with this answer is e 2iπ
April 4th, 2012 at 12:21:39 PM
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Quote: JBThe probability that I am happy with this answer is e 2iπ
And yet you bought tickets...
"So drink gamble eat f***, because one day you will be dust." -ontariodealer
April 4th, 2012 at 12:27:38 PM
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Quote: AcesAndEightsAnd yet you bought tickets...
Several days before I asked the question. Also, my net worth is much lower than the figure the Wizard used as an example; thus, winning the lottery would increase my happiness.
April 4th, 2012 at 1:21:25 PM
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Quote: JBSeveral days before I asked the question. Also, my net worth is much lower than the figure the Wizard used as an example; thus, winning the lottery would increase my happiness.
But losing also decreases from your happiness more. Assuming the lottery were positive EV, then from a utility of money standpoint, the wealthier you are the greater your expected increase in happiness by buying tickets.
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
April 4th, 2012 at 1:28:20 PM
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Quote: Wizardthe wealthier you are the greater your expected increase in happiness by buying tickets.
Its a proven fact that lottery winners get back to the
happiness level they had before they won very quickly.
Some go below that level and never get back to it.
Money can't buy happiness, what a revelation.
What happens is, once they get used to the money,
they realize their lives are now full of dumb crap
they have to deal with every day and it makes them
unhappy.
"It's not called gambling if the math is on your side."
April 4th, 2012 at 2:04:31 PM
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DERP.
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
April 4th, 2012 at 2:14:21 PM
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Quote: WizardBob and I plan to discuss this on Thursday's radio show. In preparation, I wanted to calculate what the expected return of a ticket was.
With 651,915,940 tickets sold, and the chances of winning of 1 in 175,711,536, the expected number of winners was 3.71. That would average 172,499,821 per winner. Note that I'm dividing by expected winners, not actual winners.
Based on examples, at the Mega Millions web site, I show 58.7% will be left if selecting the lump sum. Most of that will be taxed at the 35% tax rate, leaving about 38.14% left, or about $65.8M per winner. Considering that, and the smaller prizes, the return on investment was 55.6%.
This is how I calculated the return. This is based stricktly on the cash value amount of $462 million. p(winning + n-extra winners) is 1/175,711,536 * (651,915,940/175,711,536)^n*e^-(651,915,940/175,711,536)/n!, where the calculation after 1/175,711,536 is the poisson distribution of n-extra winners.
| n-extra winners | p(winning + n-extra winners) | cash value | contribution |
|---|---|---|---|
| 0 | 1.39284E-10 | 462000000 | 0.064349409 |
| 1 | 5.16766E-10 | 231000000 | 0.11937294 |
| 2 | 9.58639E-10 | 154000000 | 0.147630456 |
| 3 | 1.18556E-09 | 115500000 | 0.136932738 |
| 4 | 1.09966E-09 | 92400000 | 0.101608166 |
| 5 | 8.15977E-10 | 77000000 | 0.062830236 |
| 6 | 5.04566E-10 | 66000000 | 0.03330136 |
| 7 | 2.67431E-10 | 57750000 | 0.015444125 |
| 8 | 1.24026E-10 | 51333333.33 | 0.006366667 |
| 9 | 5.11283E-11 | 46200000 | 0.002362128 |
| 10 | 1.89694E-11 | 42000000 | 0.000796713 |
| 11 | 6.39811E-12 | 38500000 | 0.000246327 |
| 12 | 1.97816E-12 | 35538461.54 | 7.03008E-05 |
| 13 | 5.64559E-13 | 33000000 | 1.86305E-05 |
| 14 | 1.49614E-13 | 30800000 | 4.60812E-06 |
| 15 | 3.70061E-14 | 28875000 | 1.06855E-06 |
| 16 | 8.58112E-15 | 27176470.59 | 2.33205E-07 |
| 17 | 1.87278E-15 | 25666666.67 | 4.8068E-08 |
| 18 | 3.86016E-16 | 24315789.47 | 9.38629E-09 |
| 19 | 7.53777E-17 | 23100000 | 1.74123E-09 |
| 20 | 1.39831E-17 | 22000000 | 3.07629E-10 |
| 0 | total: | 0.691336166 |
The before tax return on the jackpot alone is 69.13%. The after tax return, disregarding state income tax, is 44.94%.
Then, from the remaining prizes, I took 25% federal tax from the $10,000 and $250,000 prizes, although many people will pay 15% on the $10,000 prize.
| regular draws | mega ball | p(winning) | prize | after tax prize | contribution |
|---|---|---|---|---|---|
| 5 | 0 | 2.56102E-07 | 250000 | 187500 | 0.048019044 |
| 4 | 1 | 1.45124E-06 | 10000 | 7500 | 0.010884317 |
| 4 | 0 | 6.53059E-05 | 150 | 150 | 0.009795885 |
| 3 | 1 | 7.25621E-05 | 150 | 150 | 0.010884317 |
| 2 | 1 | 0.001185181 | 10 | 10 | 0.011851811 |
| 3 | 0 | 0.003265295 | 7 | 7 | 0.022857065 |
| 1 | 1 | 0.007111087 | 3 | 3 | 0.021333261 |
| 0 | 1 | 0.013368843 | 2 | 2 | 0.026737687 |
| total: | 0.162363386 |
So, the after tax, overall return, is 61.17%.
I heart Crystal Math.
April 4th, 2012 at 2:27:45 PM
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Quote: CrystalMathThis is based stricktly on the cash value amount of $462 million.
Why would you use the cash value? It seems like most money-savvy people would take the annuity. I know I would have.
"So drink gamble eat f***, because one day you will be dust." -ontariodealer
April 4th, 2012 at 2:32:23 PM
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Quote: AcesAndEightsWhy would you use the cash value? It seems like most money-savvy people would take the annuity. I know I would have.
If you think you can beat 2.875% over the next 25 years, you take the cash.
I heart Crystal Math.
April 4th, 2012 at 2:37:22 PM
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Give me the money NOW In 25 years I will be 96. Look for my obituary to see if I have been shot by a jealous husband. LOL
April 4th, 2012 at 7:42:23 PM
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Quote: AcesAndEightsWhy would you use the cash value? It seems like most money-savvy people would take the annuity.
May a lottery annuity be passed on to an heir, or does it end with the death of the winner?
April 4th, 2012 at 7:51:53 PM
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Quote: CalderMay a lottery annuity be passed on to an heir, or does it end with the death of the winner?
It is passed on and will be paid in full as long as there is a rightful heir.
But if you think you can do decent money management, you might as well take the lump sum and invest the money yourself into very conservative places. They are giving you the same return you could get anywhere else, and at that level, you aren't going to expose much of the winnings to lower tax rates.
April 4th, 2012 at 8:51:33 PM
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Quote: AcesAndEightsWhy would you use the cash value? It seems like most money-savvy people would take the annuity. I know I would have.
Most people favor annuities over cash value, when the annuity lasts the indeterminate period of the rest of their life. They are afraid of outliving their money.
In the case of the lottery, the annuity is a fixed 26 years, regardless of the lifetime of the recipient (which could be shorter or longer).
The annuity is a way for the lottery commission to swell the value of the prize. They only need to invest enough money to secure the annuity. Since 26 years is a long time, the interest rate paid on a 26 year annuity where the principal is guaranteed is extremely low.
Basically, your average person believes that even a cautious investment will return a higher rate of return. On paper the argument is unassailable. The problem comes with money management and the demands of friends and relatives plus fees to money managers. They will probably be seduced into much higher risk investments.
While it is tempting to say that the lottery winners are often poorly educated and vulnerable to manipulation or outright stupid, there are plenty of cases of well educated successful people who have blown massive earnings on poor investment portfolios or been pressured into unwise giving by friends and relatives.
It is probably prudent for a lottery winner to initially keep the basis of his life intact, and only reward themselves sparingly. In the case of over $100 million principal, the winner should be able to live very well without touching the principal. Gifts to friends and relatives should also come out of the interest, as the true friends will still be there after many years.
April 4th, 2012 at 8:55:39 PM
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" While it is tempting to say that the lottery winners are often poorly educated and vulnerable to manipulation or outright stupid, there are plenty of cases of well educated successful people who have blown massive earnings on poor investment portfolios or been pressured into unwise giving by friends and relatives."
I believe give a few well educated people were on Bernie Madoff's sucker list.
I believe give a few well educated people were on Bernie Madoff's sucker list.
April 4th, 2012 at 8:56:51 PM
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I am not a tax authority, nor do I frequently play one on the internet. However, I think that one of the big advantages of the annuity payout is the tax deferral. The lottery is investing the pre-tax funds; if you take the cash lump sum, then you must pay the taxes in year 1 and can only invest the after-tax amount. In order to get the same total return, you have to get substantially higher rate of return because you are probably only investing 55% to 65% as much money. If you can do that without dramatically increasing your risk, I suppose you should go for it.
April 4th, 2012 at 9:24:56 PM
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Quote: CrystalMathSo, the after tax, overall return, is 61.17%.
Close enough to my 55.6% to let me sleep at night.
Quote: cclub79It is passed on and will be paid in full as long as there is a rightful heir.
I'm quite sure that is correct. There is a myth that lottery annuities can't be inherited.
Quote: cclub79But if you think you can do decent money management, you might as well take the lump sum and invest the money yourself into very conservative places. They are giving you the same return you could get anywhere else, and at that level, you aren't going to expose much of the winnings to lower tax rates.
An advantage to taking the annuity is more of your winnings fall in the lower tax brackets. With a lump sum almost all of it will be taxed at 35%.
"For with much wisdom comes much sorrow." -- Ecclesiastes 1:18 (NIV)
April 4th, 2012 at 9:51:21 PM
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Quote: DocI am not a tax authority, nor do I frequently play one on the internet. However, I think that one of the big advantages of the annuity payout is the tax deferral. The lottery is investing the pre-tax funds; if you take the cash lump sum, then you must pay the taxes in year 1 and can only invest the after-tax amount. In order to get the same total return, you have to get substantially higher rate of return because you are probably only investing 55% to 65% as much money. If you can do that without dramatically increasing your risk, I suppose you should go for it.
Doc has a good point. but with the lump sum, there must be ways to establish corporations that pay salaries and retirement plans to all member of your family to defer the tax disadvantage of getting so much money at once at high tax rates.
I remember wondering how O.J. Simpson could get his retirement plan so large that was protected from lawsuits. At the time, what I thought were retirement limitations to tax free contributions every year, couldn't get close to his balance even with the best possible investment strategy. While you and I might know something about a 401K, these people have access to 412 Defined Benefit Pension Plan.
There are also Qualified Personal Residence Trust (“QPRT”). The personal residence, and up to two vacation residences are transferred to a QPRT.
Family Limited Partnership (or FLLC).
April 5th, 2012 at 7:03:57 AM
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Once again I say, "I am not a tax authority...."Quote: pacomartinDoc has a good point. but with the lump sum, there must be ways to establish corporations that pay salaries and retirement plans to all member of your family to defer the tax disadvantage of getting so much money at once at high tax rates.
The lottery payout amount, either lump sum or annuity, will be taxed as ordinary income. After that, you can do lots of things to reduce taxes on whatever additional income you generate through investment or whatever, but that 35% to federal taxes and whatever applicable % to state taxes will be gone from the lump sum before you even get a chance to put it to use.
The best tax avoidance method that comes to my mind as applicable to folks who would frequent this forum is this: take the annuity and try to establish yourself as a professional gambler. Spend as much time in casinos as you like or can stand, but at least enough to make it clear that you are trying to make a living at gambling and not enough to blow your funds as EvenBob expects. Then each year write off whatever gambling losses you incur against your winnings (including the lottery annuity payout) and also deduct your gambling business expenses, such as travel to the casinos, lodging, meals, etc.
I suspect that since your "gambling income" will be high and rather consistent from year to year, a good tax accountant and attorney could make that work for you so that you can have a lot of fun in casinos with the government substantially paying the tab (by letting you lose some of your winnings rather than just taking the money away from you as taxes on ordinary income). The taxes on gambling income and deducted losses wouldn't be affected by being a "professional" gambler, but you would add the deductability of gambling-related expenses that most of us don't get to deduct now.
And you might be able to have your spouse and other relatives as employees who provide assistance in your gambling, travel arrangements, etc. I highly doubt that if you took the lump sum your attorney/accountant could convince anyone that you were a professional gambler that year and had to shift all the money into your corporate accounts without paying out the usual percentages as taxes right away.
April 5th, 2012 at 7:34:11 AM
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It wasn't really independent thought... the statute provided that any marital asset that was concealed would be forfeited in its entirety to the innocent spouse. The judge simply ruled that there would be no exception made for a massive lottery winning. If the wife had dumped it into the hotchpot in an honest and open manner she would have received one half its value, by concealing its existence she simply forfeited her half to the innocent spouse. It made headlines due to the dollar amounts involved but not the laws that were involved.Quote: buzzpaffI remember reading that story. At least one judge appears to be capable of independent thought.
April 5th, 2012 at 7:48:56 AM
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That might work but the IRS might well claim that your lottery winnings were realized each year but since no bet was placed that year they were not the result of any gambling that took place that year but were simply deferred payments as a result of the initial purchase of a lottery ticket and that any subsequent gambling related activity by you were merely the trappings of a professional gambler rather than actually earning a living as a professional gambler since in no subsequent year were your winnings significantly on the positive side.
April 5th, 2012 at 8:12:51 AM
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Quote: FleaStiffThat might work but the IRS might well claim ...
Yep, that's why you would need a better tax attorney than a random engineer who posts on a Las Vegas forum. I just offered it as a possible strategy. And one that would be fun to implement particularly if it was accepted by the IRS.
My other thought on lottery taxes and a good fantasy win is this: always buy your tickets in a state that either doesn't have a state income tax or doesn't apply state income tax to lottery winnings. While the fed tax takes the big bite, if you won a mega jackpot that pays out half a billion dollars or more, just change your residence (at least your tax residence) to a state that doesn't have income tax. Avoid that 5% or 7% or whatever from each annuity payment and that could be a tax savings of close to $2 million per year -- plenty to justify changing your residence. You just wouldn't want the lottery money to be taxable by either the state where the ticket was purchased or the state where you claim your tax residence.
April 5th, 2012 at 8:22:48 AM
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Quote: Wizard
An advantage to taking the annuity is more of your winnings fall in the lower tax brackets. With a lump sum almost all of it will be taxed at 35%.
This benefit fits well with your utility argument. I care a lot more about these savings when I win a $5MM Hot Lotto prize (200,000/year for 25 years annuity due) than when I win a $640MM MegaMillions prize ($24.62MM/year for 26 years annuity due), because the tax savings are a much larger portion of the total prize.
"So as the clock ticked and the day passed, opportunity met preparation, and luck happened." - Maurice Clarett
April 5th, 2012 at 8:50:40 AM
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" Close enough to my 55.6% to let me sleep at night. "
Really ? An answer that is only 91% of the true answer ! Is leas than 10% error rate now acceptable ?
Can Las vegas have corrupted yet another mathematically pure soul ?
Next you will be telling me you did NOT count the steps as you ran up the Stratosphere. LOL
Really ? An answer that is only 91% of the true answer ! Is leas than 10% error rate now acceptable ?
Can Las vegas have corrupted yet another mathematically pure soul ?
Next you will be telling me you did NOT count the steps as you ran up the Stratosphere. LOL
April 5th, 2012 at 9:47:58 AM
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I think one good way to make your decision on lump sum versus annuity is to calculate the rate of return required from your after tax lump sum to generate the same annuity stream over a 26 year period.
I looked at Mega Millions page just now and the $20MM jackpot offers a $14MM cash option (obvioulsy these are estimates). Taking 65% remaining of your $14MM cash option (assuming you pay federal taxes only on the entire amount...that estimate is close enough) leaves you $9,100,000. To generate 26 annual payments of $769,230 ($20MM divided by 26 years), you would need a 7% annual return.
That is a risk free 7% rate of return, which doesn't exist out there in investment land since the 30 year Treasuries are yielding 3.3% currently. So, the financially correct answer is to take the annuity, but if you consider the human element of the winner's own particular set of circumstances, only they can decide what is the right answer for them.
Kind of like we all know we shouldn't be playing the high HE side bets in our game of choice, but some do because there is an entertainment value of the volatility experience that each person will value differently and some will decide that entertainment value is "worth more to them" than the cost of the high HE.
It goes against the Wiz's motto of its not whether you win or lose, but did you make a good bet. But for some, the motto is "It isn't whether you made a good bet, it's whether you had a good time at the tables". To each his own.
I looked at Mega Millions page just now and the $20MM jackpot offers a $14MM cash option (obvioulsy these are estimates). Taking 65% remaining of your $14MM cash option (assuming you pay federal taxes only on the entire amount...that estimate is close enough) leaves you $9,100,000. To generate 26 annual payments of $769,230 ($20MM divided by 26 years), you would need a 7% annual return.
That is a risk free 7% rate of return, which doesn't exist out there in investment land since the 30 year Treasuries are yielding 3.3% currently. So, the financially correct answer is to take the annuity, but if you consider the human element of the winner's own particular set of circumstances, only they can decide what is the right answer for them.
Kind of like we all know we shouldn't be playing the high HE side bets in our game of choice, but some do because there is an entertainment value of the volatility experience that each person will value differently and some will decide that entertainment value is "worth more to them" than the cost of the high HE.
It goes against the Wiz's motto of its not whether you win or lose, but did you make a good bet. But for some, the motto is "It isn't whether you made a good bet, it's whether you had a good time at the tables". To each his own.
April 5th, 2012 at 10:11:26 AM
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Lump sum. Tax rates on the top level of income are historically low. Hard to imagine they won't be higher in the future.
April 5th, 2012 at 11:07:56 AM
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SooPoo is right. According to Megamillions, a 60 million jackpot would have a cash payout of 35,210,000 or will have an annual payout of 2,307,692.31 per year over 26 years.
The states and the feds will take their portion on payment based on their withholding rates. That rate I believe is based on where the ticket was sold, not where you reside. When you file your return, your taxes will be calculated on the state where you reside. So, even if the ticket was sold in California (no state tax), if you live in Nevada, you will pay state tax based on where you reside.
I strongly feel that the cash option is not a good option, for both greed and tax reasons. If you all of a sudden have $21 million in the bank when you are used to having a salary of say $100,000 / year, you face a good possibility of living a lifestyle where the money disappears all too quickly. It would take a great deal of discipline to not spend all of the money in the first few years and to give away a great deal.
Your tax rate is marginally less with an annuity, as the first $376K / 192K has a lower tax rate. On a payout like $60,000,000, this might lower your tax rate overall by 1 or 2 percent at the most.
With an annuity, you have 26 chances to screw up with smaller amounts. You take the risk of increasing tax rates, but you will be far more likely I think to succeed. Even with 1.38 million / year in cash, that gives you a very nice house (you take out a mortgage and amortize the mortgage over the annuity, taking the mortgage deduction) and allows you to travel.
The only way I would take the lump sum is if I were to invest it in a business or find a way that an accountant could guarantee me a payment beyond what the annuity would pay. Certainly, if I took a lump sum, it would be to pay off all bills, buy the house that I wanted (would I even want a house), buy the cars that I wanted, do the initial travel that I wanted, give the gifts that I wanted, and then setup a lifelong annuity that would pay a "salary" every year for life with the reset.
Of course, I am fantasizing.
The states and the feds will take their portion on payment based on their withholding rates. That rate I believe is based on where the ticket was sold, not where you reside. When you file your return, your taxes will be calculated on the state where you reside. So, even if the ticket was sold in California (no state tax), if you live in Nevada, you will pay state tax based on where you reside.
I strongly feel that the cash option is not a good option, for both greed and tax reasons. If you all of a sudden have $21 million in the bank when you are used to having a salary of say $100,000 / year, you face a good possibility of living a lifestyle where the money disappears all too quickly. It would take a great deal of discipline to not spend all of the money in the first few years and to give away a great deal.
Your tax rate is marginally less with an annuity, as the first $376K / 192K has a lower tax rate. On a payout like $60,000,000, this might lower your tax rate overall by 1 or 2 percent at the most.
With an annuity, you have 26 chances to screw up with smaller amounts. You take the risk of increasing tax rates, but you will be far more likely I think to succeed. Even with 1.38 million / year in cash, that gives you a very nice house (you take out a mortgage and amortize the mortgage over the annuity, taking the mortgage deduction) and allows you to travel.
The only way I would take the lump sum is if I were to invest it in a business or find a way that an accountant could guarantee me a payment beyond what the annuity would pay. Certainly, if I took a lump sum, it would be to pay off all bills, buy the house that I wanted (would I even want a house), buy the cars that I wanted, do the initial travel that I wanted, give the gifts that I wanted, and then setup a lifelong annuity that would pay a "salary" every year for life with the reset.
Of course, I am fantasizing.
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You want the truth! You can't handle the truth!
April 5th, 2012 at 12:02:09 PM
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Quote: SOOPOOLump sum. Tax rates on the top level of income are historically low. Hard to imagine they won't be higher in the future.
Agree with you on this but keep in mind that you will be paying that higher tax rate on 55% of the cash flow generated from the lump sum in my analysis. The $9,100,000 will need to generate $10,900,000 of earnings in order to keep pace with the annuity stream of $769K per year. That $10.9MM will also have to pay the "higher rates" in the future.
Instead of every dollar of annuity being taxable at these higher rates, only a portion of you income stream under the lump sum analysis will be taxable at the higher rates. How much that impacts the risk free rate of return required depends on the assumptions for income tax rates increases.
Maybe that drops the risk free rate of return required for the lump sum option to keep up by 2%, but I think the rate increase would need to be Draconian for the 7% risk free rate to drop to 3.3% that the 30 Yr. Offers today. By Draconian I mean going from 35% to 60-70%.
But again, I think all of these issues are likely secondary to one's personal set of circumstances. Who the winner is and their particular preferences are going to drive the "right" decision for them. It is always the soft, human issues with people that end up determining their financial decisions. It is rare that you find people that make those decisions strictly based on the numbers.....this board excluded of course :-).
April 5th, 2012 at 12:05:14 PM
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Quote: SOOPOOLump sum. Tax rates on the top level of income are historically low. Hard to imagine they won't be higher in the future.
Quote: boymimboSooPoo is right. ...
I strongly feel that the cash option is not a good option, for both greed and tax reasons.
SOOPOO is right but you choose the opposite action? I don't understand.
Quote: boymimboThe states and the feds will take their portion on payment based on their withholding rates. That rate I believe is based on where the ticket was sold, not where you reside. When you file your return, your taxes will be calculated on the state where you reside. So, even if the ticket was sold in California (no state tax), if you live in Nevada, you will pay state tax based on where you reside.
It is both. If the state where the ticket is sold (and the lottery is operated) taxes lottery winnings, then they will withhold and expect you to file a return, even if you file it as a non-resident. If the state of your residence also has a state tax, then they will want to collect tax on the lottery payout also, but they will likely give you credit for the taxes that you paid to the lottery state. In essence, you wind up paying the equivalent of the higher of the two tax rates.
That is why I made my suggestion that you buy your ticket in a state that doesn't tax lottery winnings; then, if you happen to win the big one, you change your residence to a state (the lottery state or another one) that does not have a state income tax. If you plan to take the lump sum cash payment, you would need to make your residence change prior to claiming the prize, but I am not completely certain that would work without a battle. If you take the annuity, the worst that would happen is that you would pay state tax for one year's annuity payment to your former state.
Changing residence probably isn't worth the effort unless you hit a significant jackpot. On the other hand, I think a good tax attorney can probably get your "tax residence" changed without disrupting your life all that much. Since I'm still not claiming to be a tax authority, I don't know the details, but it's possible to spend most/all of your time one place and have a different place as your residence. I suspect Obama is still an Illinois resident, and he rarely goes there. I understand that George Bush the elder for a lot of years had his official residence as a hotel suite (a la Howard Hughes) in Texas because his government career moved him around a bit. I think if you had a designated residence spot, listed that on your federal taxes, had your voting registration and your driver's license there and a few such things, you could sleep most nights in a different state and still claim that designated residence state for your state income taxes. Of course, you might need to pay state taxes as a non-resident somewhere else, but if your primary revenue was the lottery annuity from a non-taxing state, you would be off the hook, I think.
April 5th, 2012 at 1:02:22 PM
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For most states, your residence is where you sleep unless you meet a certain set of exceptions (i.e. military has special rules, elected officials may have some as well, temporary work status of less than a year, & some others).
Unless you meet one of these exceptions, you are only as safe living in one state and claiming residency in another if the states don't know about it. I am a CA CPA and based on my experience, it CA knows about you living here they aren't going to care that you have a P.O. Box or voting rights in Nevada.....if they find you, you will pay CA taxes.
Of course lottery winnings aren't taxable in CA, so you have that going for you if you live here.
Unless you meet one of these exceptions, you are only as safe living in one state and claiming residency in another if the states don't know about it. I am a CA CPA and based on my experience, it CA knows about you living here they aren't going to care that you have a P.O. Box or voting rights in Nevada.....if they find you, you will pay CA taxes.
Of course lottery winnings aren't taxable in CA, so you have that going for you if you live here.
