I took a discrete probability class in college. My friends told me I was crazy to take a math course to fill one of my unrestricted elective courses, when there were clearly ‘easier’ options available that would not jeopardize my chances of graduation. To a numbers nerd like me, probability and statistics were always of interest, and quite frankly just made sense – maybe it’s the practical application of these concepts (I haven’t used calculus since college), or how closely these topics relate to real life, but I still think that was one of the best course I’ve ever taken. To illustrate how probabilities can affect your life, let’s look at an example that every single person reading this can relate to: As I sit here today, the Powerball jackpot is $500 million dollars. While not the biggest lottery jackpot in history, $500 million is a lot of money, even to someone as wealthy as Warren Buffett or Bill Gates.
The odds of winning the Powerball Jackpot used to be 1 in about 175 million, however, that was before October of 2015 when they changed the rules. Those odds would be considered ‘good’ by today’s standards, and although that may seem like a silly thought, consider this: the current chances of winning the jackpot are 1 in 292,201,338 (per the Powerball website), or 0.00000034%. A recent rule change increased the numbers available to play with, from 1-59 to 1-69. While they did reduce the number of balls for the red Powerball itself, from 1-39 to 1-26, this did little to help eager Americans who are lined up a gas station counters all over the country. To put it into perspective, you are far more likely to get struck by lightning (1 in 700,000 in any one year per National Geographic), getting dealt a royal flush (1 in 30,939) or a hitting a hole-in-one (approximately 1 in 12,500). If the math doesn’t taint your level of excitement when looking at that big number, we can fast forward to the minute that you do win that prize money and what happens to it.
We all know that the stated jackpot prize is not the walkaway value if you wanted that big fat check to cash the day you go to claim your price. That number is currently $306 million (thank the present value of an annuity calculation for that $194 million decrement in value). While still nothing to complain about, you now have to cut that check into a few more pieces before you have the chance to reap the benefits of what is truly yours. Doing some quick math, about 40% ($122.4 million!) of that is going to go directly to Uncle Sam to satisfy your federal income tax obligation, and those lucky enough to live in the State of CT will find themselves giving another 6% ($18.36 million!) to the CT department of revenue services who will gladly accept your generous donation. After all that, you’re left with about $165.24 million to play with. What a quick way to turn $500 million into $165 million!
Ok – so maybe $165 million for not doing that much isn’t too bad. For well over 99% of America, that is a life changing number, and even to the mega rich this would be a massive windfall. Aside from buying a super yacht, private island, or penthouse in Monaco, frivolously spending this amount of money would be difficult, even if you try really, really hard. If you’ve ever seen the movie ‘Brewster’s Millions’ you know what I’m talking about. That being said, placing your faith in a retirement strategy that has only a 1 in 292 million chance of paying off may not be the soundest plan by any stretch of the imagination, but for me to sit here and say that the thought of it isn’t even a little bit fun would be a total lie.