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How winning record $2 billion Powerball jackpot could still lead to bankruptcy

The Conversation recently published an article written by Jay Zagorsky, Clinical Associate Professor, discussing the logistics behind the largest Powerball jackpot in history and the woes that can come with winning.

Jay Zagorsky

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Got the winning ticket? AP Photo/Julio Cortez

Someone in Altadena, California, was the lucky winner of the largest Powerball jackpot in history – or perhaps the unlucky winner?

Officials revealed that the winning ticket was purchased on Nov. 8, 2022, after the Powerball jackpot swelled to US$2.04 billion.

The prize was the largest lottery the world has ever seen, overtaking a $1.6 billion Powerball jackpot in 2016 and $1.54 billion Mega Millions in 2018.

The odds of winning the Powerball lottery are very small, about 1 in 292 million. You are about 300 times more likely to be hit by lightning. If every adult in the U.S. purchased just one ticket, each with a different number, there would still be a good chance – about 11% – that no winner would emerge at a given drawing and the pot would continue to grow even larger.

But once a lottery winner is declared and claims the prize, a more interesting question arises: What happens to all that money and the supposedly lucky ticket holder? As research by me and others shows, it’s often not what you’d expect.

a bolt of lightning can be seen on the horizon in the clouds above the sea
You’re 400 times more likely to be hit by a bolt of lightning than to win the Powerball.
Jerry Kestel/EyeEm via Getty Images

A smaller prize than it seems

The first thing to bear in mind is that even when the jackpot is eye-wateringly large, the actual payout will be much less.

If someone comes forward with the winning ticket, they will not actually receive $2 billion in one big check. As a single winner, they can either choose a lump sum payment that amounts to about $929 million or receive $2 billion worth of annual payments that get progressively higher over 30 years.

Also, the taxman gets to take a big bite. The federal government will take about $344 million, leaving $585 million if it’s a lump-sum payment. And then the state in which the winner resides will swallow a smaller portion if it has an income tax, as California does.

That jackpot is starting to look a lot 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 and Bruce Sacerdote and statistician Donald Rubin showed in a 2001 paper that people tend to spend unexpected windfalls. A look at lottery winners approximately 10 years after they won found they saved just 16 cents of every dollar won.

In my own research, I found that average people in their 20s, 30s or 40s who were given an inheritance or large 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 only postponed the inevitable bankruptcy. One found that one-third of lottery winners eventually go bankrupt.

It’s not easy to blow it all

So how exactly could a 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 U.S. lives to age 80.5 and the average male to 75.1.

So that means if 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 spend a bit 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, really 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 Ferraris and Aston Martins, her net worth wouldn’t actually 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.

Two white men in suits, ties and coats stand next to each other in New York in front of a tall building. One of them is pointing and looking up
Huntington Hartford, at left, next to Robert Moses, was born rich but died in bankruptcy.
AP Photo

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 Co. fortune. This company, which started just before the Civil War, is better known as the A&P supermarket chain. A&P was the first U.S. 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 largest fortunes in the world.

Hartford had the reverse Midas touch. He lost millions 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 as a recluse with a daughter in the Bahamas until he died.

May the odds be ever in your favor

Hartford’s life story, coupled with academic research, shows that coming into a windfall of cash doesn’t always have a happy ending. Squandering that money is easier than it seems.

If you like to pay the lottery, I wish you good luck. If you win, I wish you even more luck.

Nevertheless, one key lesson, whether you play or not, is that when you get a windfall or win the lottery, plan ahead and resist the all-too-human temptation to spend all the money.

This article was updated on Nov. 10, 2022, to reference the winner.The Conversation

Jay L. Zagorsky, Clinical associate professor, Boston University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Jay Zagorsky is Clinical Associate Professor in Markets, Public Policy, & Law and is a cross-disciplinary researcher who has spent over two decades of researching a wide variety of personal wealth topics. He tries to explain why some people become rich, others are poor and some move between these two states. He is currently synthesizing this research into a book that presents the results of his academic research and other wealth researchers in an accessible format.

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