How Does The Lottery Work?

John Healy

Hi, I’m John Healy, chief investment officer of Healy Wealth Management, and today I want to talk about the lottery. Recently we had a big jackpot here on Powerball in Georgia, $1.8 billion was split between two winners. One of them was in Missouri and one of them was in Texas. That’s right. Different states. Powerball is a multi-state lottery, so we had two out-of-state winners. Got up to 1.8 billion because there were like 42 rollovers of the pot that there was no winner.

And then we got two on September 6th. You think that means that each of the two winners would get half of 1.8 billion, or 900 million each? No, that’s not the way it works. You get into the calculation of it. The 1.8 billion is the total of all the annuity payments over 30 years. And it’s calculated based on the Treasury bond rate, or around 5%.

What it actually is, is 820 million. And there are two of them. So they each get 410 million. So the question is whether you would take the annuity that they offer or whether you take the lump sum. And I would definitely recommend that they take the lump sum and not the annuity. The main reason is that once you take the annuity, you’re stuck with it.

You have no other options. If you take the lump sum, you can invest it any way you like. You can even buy an annuity that would possibly, and probably likely give you better income while not locking you in for 30 years in case something better comes along later. Or if something happens to the lottery. Now let’s talk about taxes they will withhold so that you won’t pay it yourself.

They’ll just take it out before you get it. They’ll take 24% federal tax will take 6% state tax in Georgia because you pay the Georgia tax since you bought the Georgia ticket. These two winners were likely not purchasers of paper tickets. They probably played online, which I think is smart. I’ll mention that in a minute. 410 million before tax.

After the 24% federal and 6% state withholding, they’ll each get a lump sum of 287 million. So that’s a far cry from what you might have thought that you’d get 900 million. You’d get 287 million, but still a lot of money. Now, how can you claim your prize? For a large prize like this, you can keep your identity confidential by request.

You have 180 days to claim. I would recommend going ahead and signing it. Put your name on the back. Sign it. I know some people say not to do that, but I think it’s the best way to go. Take a picture of it. Upload that picture on the cloud. Keep a backup of that picture so that if you lose it or someone steals it, you can sue and have evidence that you actually owned the ticket before they stole it.

Put it in a safe or safe deposit box until you claim it, and I would claim it as soon as possible. You want to get it into an account. Again, so these two guys were smart, or gals? I don’t know who they were. We don’t know who they are yet, so they’re probably smart and requested anonymity. It seems like they played it online and that way they have a record.

If you purchase a ticket paper form, there’s no official record that you bought it. The retailer where you bought it might have some recollection or video that you bought it, but there’s really no official record. The paper ticket is actually just a bearer certificate. There’s no transfer agent. Slightly regulated, so if you lose it, you have to prove your ownership.

If you have the ticket and you lose it, you didn’t take a picture, you didn’t sign it. It’s just a blank ticket and you lose it or someone steals it? Good luck. Stock certificates. When you buy a stock, they’re actually registered in your name directly with the transfer agent. So just for comparison, stake. It’s an interesting case where if you look at how stock certificates are different than lottery tickets, there’s a big difference.

You can register your shares in your name. You can do it with the broker dealer. Or you can do it directly with the company. Or you can register in what’s called street name, where the broker dealer registers with the transfer agent. Transfer agents are like trust companies and banks that are highly regulated. So there’s a whole, you know, system and piping of the financial system really.

If you lose it, it’s no big deal. We can help you if you think you might have had some certificates some day that you lost. Let us know. We can research it and we can find it. See if you’re registered. I mean, it goes way back. The systems go way back. The records go way back. We’ve done that for clients.

And sometimes you find money. I think grandma had a stock certificate in the wall. When Warren Buffett, I’m a big Buffett fan. But one great story is when he made his donation, his first donation to the Gates Foundation. He held the certificates. He had to go down to the bank and get them out of the safe deposit box and sign them over to the transfer agent.

They didn’t disclose everything, but basically transferred it over to probably a trust for the gates Foundation. But anyway, he gifted those shares. They were worth 11 billion. So imagine you have this piece of paper. People think, well, gosh, $11 billion. Buffett giving this piece of paper. But if he had lost it, it wouldn’t have mattered.

It was registered with the transfer agent, transfer agent, like a J.P. Morgan, for instance. You know, big companies like that that are in ingrained in the financial system that you don’t have to worry about it if you lose your- it’s a hassle if you lose your stock certificate. But if it’s a legitimate stock certificate, it has been registered and you’ll get your money.

Let’s talk about the lottery business. Warren Buffett again, he’s called the lotteries, or gambling. He says a tax on ignorance. My father used to say involuntary taxation. And when Buffett was raising his young children, he even he did buy a slot machine to kind of teach his kids how you end up losing over time. Kind of a lesson to teach your kids by taking their money, by having a slot machine in their house.

I’ve heard that. I don’t know if it’s a true story, but I’ve heard people say that was a story that people talk about with Buffett. So it’s a tax on ignorance because the odds of winning are just so ridiculous. The Powerball odds in this case were one in 292 million. The statistics are that one only one in a little

over a million people in the world were struck by lightning last year. So just people living their normal lives, in a year. You know, if you’re living a normal life, you have a much better chance of being struck by lightning in the year than you were winning the lottery. So that kind of gives you some perspective. Let’s talk about the business of the lottery.

Georgia Lottery, it’s called the Georgia Lottery Corporation, and it’s state owned. It’s run by a board that’s elected by the governor. Interestingly, it’s self-funded by the ticket sales. It’s not like a general obligation bond that the state issues where the bond would have the full taxing authority of the state to pay the bond. If you look at the credit worthiness of the Georgia Lottery Corporation, it’s just based on the operation of the lottery.

It’s based on ticket sales. So, you know, that’s another reason not to take the annuity, is you’re locked in to this creditor who’s going to be paying you your money over the years and who knows, 30 years. I don’t know if I’d invest in the Georgia Lottery as a company for 30 years. And they wouldn’t have as good a credit rating as the state.

You can, buy a Georgia general obligation bond that would yield almost 4.5%. So that’s the kind of yield you might be able to get tax free, federal and state tax free. So if you’re in a 22% federal tax bracket and living in Georgia, that would be the equivalent of a 6.3% pre tax. So compare that to, you know, 5% treasuries. Put a significant chunk of the money, a Georgia general obligation bond be a higher credit than the lottery.

And you get a 6.3% yield which would be better than the 5% annuity you get. So the Georgia Lottery Corporation, I looked at their financial statements. In 2024, they, their ticket sales were $6 billion and 65% of that was paid out in prizes. 25%, one quarter was paid to the state’s hope and pre-K education programs. And then by statute, 6% of ticket sales go to the retailers who sell the tickets.

That’s not just free money. They have to follow the rules. And there’s some, you know, expense that they have to incur to be engaged in selling the lottery tickets, particularly in poorer areas where more people buy the tickets. So this is why when you go into a convenience store in an affluent area, you may not see lottery ticket sales.

It’s not just the Georgia Lottery Corporation that runs the lottery. There’s two multi-state games, the Powerball and Mega millions are run by the Multi-State Lottery Association, or MUSL. It’s a 34 member owned lottery, and the Georgia Lottery Corporation is one of them. The Georgia Lottery Corporation. People do elect the annuity, and when they do that, the Georgia Lottery is, responsible is liable for honoring those annuity payments.

And some states, like Colorado, let the Multi-State Lottery Association hold the money. That’s set aside for investing and supporting the annuity payments. Georgia doesn’t do that. They do it themselves. They open an account at a big bank. Now they’re by law, required to invest only in U.S. Treasury securities bonds. Treasury bonds. They can’t buy anything else.

And that’s good. You wouldn’t want them speculating or doing bad investments with, the investments supporting the lottery annuities. There’s an interesting book for sweepstakes. There is no law like that. And, it’s just really regulated only by the FTC. And so the story of the Publisher’s Clearinghouse was a great book by a guy named Darryl Lester, who worked at Publisher’s Clearinghouse for 30 years,

a veteran of the company. It’s called downfall of an icon because, you know, publisher’s Clearinghouse eventually went bankrupt, and a bunch of the winners ended up having their annuities canceled. And that’s what the, Publisher’s Clearinghouse back in the day when they were doing sound investing, they would just buy a a solid insurance policy to guarantee the annuity payments, and instead they started paying them from operating cash.

That was okay because they had the cash, but they didn’t think about the future of their business. You know, the Publisher’s Clearing House was, basically a door to door magazine salesman. But it was just through the mail, and they came up with this idea for marketing to do a sweepstakes. They bought a magazine. They’d have a better chance of winning the sweepstakes, which wasn’t true, but it really made their magazine sales go through the roof.

It was a tremendously successful marketing campaign to do a sweepstakes to get people to buy more magazines. But then, of course, magazines with the internet went out of favor, and the and the revenues of of, the Publisher’s Clearinghouse were under pressure and their cash flow operating cash declined. And lo and behold, they just didn’t have enough cash flow to continue supporting the annuity payments.

And that’s what happened. It ended up going bankrupt. And so, you know, some life time winners who were living on their annuities, the payments stopped. And so that gives you a flavor for sweepstakes. You know, the regulation for sweepstakes like that, it’s very weak. You’re really only under the consumer protection law truth in advertising, federal Trade Commission, case by case, situations usually after the fact.

Lottery regulation is much better. Lotteries are under state law and they have state lottery oversight committees. It’s similar to self-regulation by state elected or appointed officials. Better regulation than the sweepstakes, for instance. Compare that to, I would say, the best regulation, securities market regulation. I think that’s the highest standard. When you buy a security at a broker dealer, buy a stock at a broker dealer, transfers agents registration, and then of course, regulation audits, reporting all this.

But at the end of the day, even if, even if, you know, there’s some terrible event that happens, and fraud or hacking gets in the way, they’ll just print the money to give everybody their money back so you don’t have to worry. That’s a very low risk to think about. You know, losing your stock certificate or having fraud happened in the in the securities market.

As long as you stay within the kind of the- just buy stocks and bonds, you’ll be fine. Now an example was there was a hack in 2024. A transfer agent, they fell prey to, spam email, ended up issuing some shares for a company, you know, was wired to Hong Kong accounts. Guess these are Chinese hackers

I guess. You know that money. They got some of it back. Some of the shares were recovered, but about $5 million. 5 million wasn’t a lot. That $5 million was not recovered. And the transfer agent, which was a big trust company, had to reimburse the issuer. And it’s a trust company, a chartered trust company. That had capital requirements.

And of course, the trust company, big Trust Company goes under. They would be bailed out. So there you go. People who buy lottery tickets tend to be located in lower income neighborhoods. For instance, in Minnesota you can track the zip codes and, you know, the overall net worth, the wealth of people in those zip codes and people in the poorest zip codes spend four times as much of their income on lottery tickets as those in the richer zip codes.

People say that 80% of winners go broke within two years. That’s there’s some truth to that, but it’s not completely accurate. It’s kind of an overblown statement. There was a study by the American Economic Review that found that ten years later, after they won the lottery, they only had about 16% of their prize money left. So it’s not it’s not as bad as going broke, but, 16% only after ten years.

So that indicates, you know, the natural human tendency is if you win the lottery, you’re going to go out and spend a lot. So, if you don’t plan much and, you don’t do much long run saving over time. You’re not going to really be saving. You’re going to be spending and enjoying it. So that’s what they typically call sudden wealth syndrome.

So you’re going to fall prey as a big lottery winner to sudden wealth syndrome if you don’t have a plan, written plan. If you don’t have a tax budget and you succumb to rapid lifestyle inflation, you got to have a strong, well-thought-out legal framework and strategy. And, you know, other than just charities and others being very aggressive to solicit money gifts from you, family pressures.

There’s a lot of social pressure. And you watch, stories on YouTube about people that have won the lottery. There’s a son that won $25 million or something like that. And, the lump sum and his mother said, well, just expected that he would give her half of it. And just because he was she was his mother and that didn’t go over well, just those kinds of stories of people losing friends, losing family members because of, hurt feelings.

Money can do things that kind of brings out the best in the worst of us. So what you really need to do is build a fiduciary team, an attorney, a CPA, financial planner, investment person, people you trust. Optimally, you would have them already before you. You won. But of course, most people don’t. So it’s, kind of a paradox.

You want to set up a gifting plan? Another interesting fact about lotteries is, the bigger the jackpot, the more the players. Ticket sales rise sharply as the jackpot rises. And the rollover effect creates more and more people. It’s why you get these ridiculous odds, I think is the more and more people play, the odds go down.

The pot goes up, but the odds go down. They call it lottery fever as the rollovers build up the pot. And I look at the spectrum in the stock market, I’d say, you know, there’s the sound investing. That’s where you look at the value of a company and you’ve analyzed it. And, then you kind of move over where you don’t really know the value of the business. You know, the value of the business depends on this great future. And you have confidence in the great future that’s unproven and that’s more of a speculative. There’s nothing wrong with that, speculating. But it’s it’s much lower hit rate if you will.

And so you make a lot of money, but most of the time you’re going to lose a lot. That can be a sound way of investing, but it’s kind of the hardest way. And we don’t do it. And we tend to advise clients to, you know, do that to small amount, maybe 10% of their overall portfolio.

You never want to speculate your retirement savings. Momentum, that’s in my view, that looks at when you’re ignoring the math of the equation that even if the the great future happens, you’re not going to make much money based on the value. So with speculating if the great future happens with the speculation, you’re going to make a lot of money with the momentum stock.

If the great future happens, the price is already so high that you still won’t make money in the long run. The only reason you buy it is because if the good future continues like it has now, I’d say Nvidia stock is at 60% revenue growth. The valuation I would say, requires them to grow five more years at 60%.

So that has to happen for you to get just a t-bill rate, as a return on your stock. Some of the other stocks in the, in the Magnificent Seven in the S&P 500 right now are trading like that. We’re buying companies that are much more solid, much more lower PE, not as, highly valued and have good long term returns embedded in our estimation, that you’ll make good money in the long run.

But the market as a whole, you know, if you look at the averages, it’s pulled up by these, these mag seven stocks, you know, like Nvidia and Microsoft and, others in there. But I’ve talked about that in the past. So that’s momentum investing and then there’s just pure out gambling, which where you know for sure that you’re going to lose.

Well not for sure, but there’s such a small, small probability that you’re going to win that it’s just, you know, people think it’s fun. Since I’m an analyst, you know, I think about this stuff too much to have fun with gambling, so I just don’t enjoy gambling. Some people do. That’s not my thing. Thanks for taking time to listen to me today and the story of the lottery.

I hope you found it interesting and maybe a little bit entertaining. Subscribe to our channel. Like the video. Tell your friends. Give me a call if you have any questions. Send us an email. We’d love to hear from you. Thank you.