Play the Mega Millions as an Investment Strategy
By: Opher Ganel
Tags: Finance, Investing, Money, Lottery, Investment

When You’re Struggling, Hope Is Critical

When we were struggling financially, something as simple as grocery shopping was hard.

We’d consciously consider each item before putting it in the cart, to make sure we’d have enough to pay rent and utilities, not to mention filling the gas tank of our one car.

Repeatedly having to say “no” to our toddlers when they grabbed a toy and put it in the cart was heartbreaking.

When that’s your financial reality, you spend a lot of emotional and mental energy trying to find a way out and up.

When you’re legally not allowed to take a second job or start a side hustle, and your wife isn’t allowed to take even a part-time job, you’re stuck with very few options.

That’s when submitting entries for the Publishers Clearinghouse Sweepstakes starts looking like a no-brainer. Yes, it takes time, but if you have time on your hands that you can’t use to earn money, you might as well — it’s free, so it’s worth it even if the chance of winning is estimated at 1 in 1.7 billion — 6x smaller than winning the Mega Millions jackpot.

At least it gives you something to hope for, helping prevent despair.

Below I describe how you can buy lottery tickets as a way of giving yourself a sliver of hope, and do it as a reasonable investment strategy…

Buying Lottery Tickets Is Usually a Sucker’s Game (but not Always…)

According to MegaMillions.com, your overall chance of winning at least $2 is 1 in 24. Here’s the breakdown (in California only, all prize amounts depend on ticket sales, in other states this is only true for the jackpot):

$2–1 in 37

$4–1 in 89

$10–1 in 323

$200–1 in 14,547

$500–1 in 38,792

$10,000–1 in 931,001

$1 million — 1 in 12,607,306

Jackpot (at least $40 million, increasing by at least $5 million each time nobody wins) — 1 in 302,575,350

To see if it’s financially worth buying a $2 ticket, you need to multiply each prize amount by the likelihood of winning that amount, then sum the products:

$2/37 + $4/89 + $10/323 + $200/14,547 + $500/38,792 + $10,000/931,001 + $1,000,000/12,607,306 + $40,000,000/302,575,350

If you do the math, that comes to just under $0.38.

Obviously, paying $2 for something worth less than 38 cents is a bad deal, giving up 81% of your money on average. A sucker’s game.

Even playing blackjack at a casino gives you a better deal — you lose an average of $2 for every $100 wagered. If you could wager $2, you’d lose an average of 4 cents — 1/40 of your average loss playing Mega Millions when the jackpot is $40 million.

Mega Millions Optional Plays

Most Mega Millions states offer a “Megaplyer” play, where you pay an extra $1 for the non-jackpot prizes to increase by a multiplier of 2x (1 in 3 chance), 3x (2 in 5 chance), 4x (1 in 5 chance), or 5x (1 in 15 chance). On average, this works out to a 3x increase for all but the jackpot.

That increases the value of the ticket to $0.87, an increase of 129% for just 50% higher ticket price. However, this is still a bad bet. You lose an average of $2.13 out of a $3 bet — 71% loss per play.

The $1 extra for the “Megaplayer” option isn’t as bad as buying the $2 ticket in the first place, but it’s still worse than playing blackjack in a casino

Some states offer another optional play called “Just the Jackpot.” Here, you play for the jackpot only and don’t get anything if you don’t match all 5 white balls and the gold Mega ball. However, for an extra $1, you get 2 tickets.

When the jackpot is $40 million, this is worth about $0.26. Your average loss here is thus $2.74 per $3 play, or 91% average loss.

Playing “Just the Jackpot” when the jackpot is $40 million or even $140 million makes a bad bet even worse

In short, neither option makes buying a lottery ticket a good idea when the jackpot is just $40 million.

Buying Lottery Tickets Can Be a Reasonable (though Ultra-Speculative) Investment Strategy

What if I told you that buying a Mega Millions ticket, or better yet many tickets, can be a reasonable investment strategy?

Say what?

I just got through telling you that the Mega Millions is a sucker’s game. So how can I now claim it can be a reasonable investment strategy?!

It’s all a question of how big the jackpot grows.

Let’s say that instead of $40 million, the jackpot is $454 million and you play “Just the Jackpot.”

The expectation value of the jackpot is now $1.50 per ticket, or $3 for a pair of tickets that costs you $3. You just hit the break-even point, or it would be if that was the lump-sum payment and you didn’t have to pay any taxes on the prize. If that was the case, anytime the jackpot is higher than $454 million, it makes sense to buy a bunch of tickets.

However, you do need to take into account both taxes and the time-value of money. That calculation is not simple, but Powerball-MegaMillions.com has a nifty tool that can do the math for you.

As of this writing, the jackpot is $65 million, and if you live in Maryland, the after-tax value of the annuity works out to $35.425 million. That’s about 45.5% less than the nominal jackpot value.

Using this to scale the $454 million not-so-break-even point, we get the real break-even at $833 million.

In Texas, where there’s no state income tax, the break-even would be just under $721 million. In New York, with a state tax of 8.82%, that’s just under $838 million.

This means that whenever the jackpot goes over say $900 million, buying a bunch of tickets does make financial sense. But… only if you can afford to lose the money, which you almost certainly will.

Whenever the jackpot goes over say $900 million, buying a bunch of tickets does make financial sense, if you can afford losing the cost of those tickets, which you almost certainly will — but that “almost” is why it makes sense

If your state has a Just the Jackpot option, it reduces the cost from $2 per ticket to $3 for two tickets. This reduces your break-even point by 25%.

How to Build an Investment Strategy Around Mega Millions

If you look online, you’ll find lots of websites that offer to sell you information that they claim will increase the odds of your winning. If you see one of these, click on. There is no legal way to increase the odds of one ticket winning the jackpot. It’s called random chance for a reason.

There is no legal way to increase the odds of one ticket winning the jackpot

However, there are certain strategies that can help you.

First, as mentioned above, only play when the jackpot is above the break-even point given your state’s income tax rate.

Second, treat this as the most speculative portion of your investment portfolio. If you allocate 5% of your annual investment for risky investments like say bitcoin, allocate a fraction of 1% to playing Mega Millions. If you invest a total of $10k for the year, and of that $500 for risky investments, consider perhaps $10 for the lottery, and even that only when you can afford to lose it.

To minimize the risk that you’ll have to share your jackpot (in the extremely unlikely case you win), choose numbers that fewer people play — e.g., since many people choose numbers related to birthdays, never pick a number between 1 and 31 for the first 5 numbers, and avoid numbers 1–12 for the Mega ball number. Since most people try to pick a random set of numbers, pick the least random-seeming set you can think of, like 32, 33, 34, 35, and 36 for the first 5 numbers and 25 for the Mega ball (of course, now that this article is public knowledge, choose a different set of unlikely seeming numbers.

If you want to get a sense of how unlikely it is that you’ll win, think of playing the numbers 1, 2, 3, 4, 5, 6 — intuitively you get how unlikely it is that this set of numbers could win, but it’s just as (un)likely as the most random set of numbers you can think of

To maximize your chance of winning, get together with a large group of family, friends, and colleagues to pool together. Buying many more tickets than any one of you could by him or herself increases your odds of winning the jackpot, but decreases by the same factor the size of your share.

On average this is a wash, but it makes a “hyper-speculative” “investment” into something that may be just “super-speculative.” If you do set up a pool, invest in getting an attorney to put together a simple contract for all pool members so if somebody else holds the winning ticket, you still get your part.

Playing in a large pool of people increases the odds of winning, at the cost of decreasing by the same factor your potential winnings; however, for most people it’s better to have a higher chance to win less

Next, since lottery tickets are “bearer instruments,” anybody who shows up with the winning ticket (unless they work for or are relatives of someone working for the lottery) will get the prize money. To make sure this is you (in the extremely unlikely case you win), write your name and sign on the back of your tickets.

If you do win the jackpot, take the annuity payments. First, it’s worth more, as you can see at Powerball-MegaMillions.com. Second, and even more important, you’ve never had to deal with investing and keeping hundreds of millions of dollars.

By taking the annuity payments, even if someone scams you out of all the money you got in Year 1 (or if a bunch of relatives you never knew you had manages to guilt you into cutting them in), you have another 29 years’ of payments to help you recover.

You can (and should) also invest most of your after-tax money, so even after the payment stream ends, you have a huge portfolio that continues to give you more than enough money to live on for the rest of your life.

Have an accountant help you figure out how much you need to pay in taxes, and set that aside so you don’t run into trouble with Uncle Sam or your state’s tax authorities.

Winning tickets aren’t forever, so make sure you claim your winnings, if any, within your state’s time limit (mostly from 180 days to a year, depending on your state).

One last thing you should do is keep your losing tickets — you should be able to claim them as a tax deduction against your winnings.

The Bottom Line

Although the lottery has been called “a tax on the financially illiterate,” if you follow the above strategies, you can use it as a legitimate (though hyper-speculative) portion of your investments. Just make sure you follow all these strategies to avoid the pitfalls that have bankrupted many jackpot winners in the past, leaving them worse off than before they won.

Disclaimer

This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel has set up several successful small businesses, including a consulting practice supporting NASA and government contractors. His most recent venture is a financial strategy service for independent professionals. You can connect with him there, or by following his Medium publication, Financial Strategy.