Mega Millions Breakeven?

For those interested in the numbers, the Mega Millions jackpot stands at $540 million. That’s the estimated nominal value of the annuity payout over 25 years (26 payments, the first one is immediate and the rest are at the end of the year). That annunity is calculated based on the current cash prize pool of $389 million.

If you won that cash prize, the federal government’s tax bite would be about $136 million, based on the top marginal tax rate of 35%. (And really, the top bracket is all that matters for this kind of money.) There could also be a state income tax, depending where you live. For those of you here with me in Illinois, that’s another 5% or about $19.5 million.

That leaves you with a mere $233 million after time-value-of-money and tax calculations. Given the 1 in 175,711,536 odds of winning the Mega Millions jackpot, this means that each Mega Millions lottery ticket you purchase has a mathematically expected value of $1.33.

That’s right, for the first time I know of, the Mega Millions lottery is above the breakeven point. It could actually make some kind of financial sense to buy a ticket.

Of course, that’s only if you’re completely risk-blind, since the most likely outcome by far is loss of all your money. By comparison, synthetic CDO’s backed by residential mortgages were a much safer investment even during the crash.

If you have a handy $175 million in cash, it might make sense to use it to buy all 175,711,536 possible lottery tickets, which would guarantee you a $58 million profit.

Well, that’s not quite true. You see there’s one thing these calculations didn’t take into account, which is that someone else could also pick the winning number. I don’t know the odds of that happening — it depends on how many people buy tickets — but if even one other person wins, it will cut your prize in half to about $117 million, for a net loss of $59 million.

Because of this possibility — multiple winners splitting the prize pool — even at a jackpot of over half a billion dollars, the Mega Millions lottery still might not actually be at breakeven.