The lottery is a shining dream of freedom from the drudgeries of daily work and the fear of financial struggle. For most, lottery money in the billions would be a free ticket out of the everyday sweat and grind of the rat race. It’s fun to imagine telling off our bosses, hugging our co-workers goodbye and giving lots of money to struggling friends and family. That dream parts Americans with over $70 billion in hard earned money each year. Somewhat of a salve is the knowledge that most lottery revenue does go to the winners, with a significant but smaller chunk paying for public programs.
Some see the lottery as a tax on stupidity while others claim it’s a ticket to dream. Some complain that winners only keep about a third of jackpots while others point out that’s still millions in lottery money. Whatever the argument, Americans love the lottery, spending more on it annually than they do on beer, TVs, pizza, books or movies.
How Much Lottery Money Gets Made Every Year?
Lottery Money by Year
|Lottery Money Made 2012||$78,000,000,000|
|Lottery Money Made 2013||$75,000,000,000|
|Lottery Money Made 2014||$70,000,000,000|
|Lottery Money Made 2015||$73,000,000,000|
|Lottery Money Made 2016||$75,000,000,000|
Americans spend a shocking $70 billion plus of lottery money per year. That number dips and rises somewhat but has remained largely constant for at least the last five years. For a glimpse at how that spending stacks up against other major spending categories in the country, see the chart below.
Also see: How to Win Powerball
Spending on Lottery Money vs Other Spending
The chart above and the table below show lottery money spent vs other popular spending categories in the United States. Americans spend more on new cars than they do on the lottery each year, but only about 31% more. Every year Americans spend $13 billion more on lottery tickets than they do on beer, according to data from the North American Association of State and Provincial Lotteries (NASPL) and the Wall Street Journal. We spend $36 million more on the lottery annually than we do on quick-serve pizza, $59 million more than we do on books and $62 million more than we do on going out to movies.
For the Love of the Lottery
It’s true that Powerball tickets cost only $2 each, but that doesn’t mean they only take in as much money as similarly priced items like granola bars or sports drinks. Lottery money accounts for a huge slice of the annual disposable spending and impulse spending pie in the US.
Lottery Money Spent vs Other Money Spent
|Category||Money Spent in 2015|
How Does Lottery Money Get Spent?
One consolation in the sheer magnitude of lottery spending in America is where the money goes. Unlike gambling money which enriches “the house,” lottery money goes largely to the winners. In fact, according to the NASPL, fully 63% of state and provincial lottery dollars goes straight into the pockets of the winners. “Pockets” is a bit of an exaggeration, since fully two thirds of that money gets eaten up by taxes and lump sum math, as a later section in this article demonstrates. Another 27% of all money made by state and local lotteries pays for public spending.
Retailers Win Big
Here’s a really interesting fact about how lottery money gets spent: retailers get a 6% of all the lottery take in terms of commissions. It’s unclear whether that money goes only to stores that sell winning tickets or if it gets split across all retailers. Even assuming the winning store only gets 2% of a lottery win, on a jackpot of $500 million that’s still $10 million. Considering that the odds of being a store that sold a winning ticket are much higher than the odds of being an individual that bought one, the smart money in the lottery game seems to be on running a mom and pop.
How Does Lottery Money Get Spent?
|Total Lottery Money Made 2015||$73,000,000,000|
Lottery Money by State
The public portion of all lottery money gets spent in different ways depending on the state. The list below shows how some states spend their lottery cash:
- Arizona: Mass transit, homeless shelters
- Colorado: Parks and wildlife, school fund
- Connecticut: Education, roads, healthcare
- Georgia: Education
- Indiana: Teachers, police, firefighters
- Louisiana: Problem gambling fund
- Maine: Outdoor heritage fund
- Michigan: Education
$3 Billion Per Year
After all is said and done, 4% of all money taken in by state and local lotteries gets kept by the lottery organizations themselves. The NASPL website states that this money covers the cost of running the lottery, including staff. That means it takes $3 billion a year to run all American lotteries. That seems high considering that Best Buy, H&R Block and Marriott U.S. all run on less.
Who Spends the Most Lottery Money?
It’s an oft-told tale that the lottery is basically a tax on the poor. According to data released by NASPL that doesn’t seem to be entirely true. People with incomes over $55,000 a year are the biggest group of lottery ticket purchasers at 44%, with those who make between $25,000 and $55,000 a year making up another 33%. Americans with incomes under $25,000 a year represent 23% of all lottery ticket buyers.
The Lottery is a Low Income Burden
The statistics above show that the poor don’t actually spend most of the lottery money in the country. That said, the saying, “lies, damn lies and statistics” comes to mind when we change those groups around a little. The same data suggest that more than half of all those who play the lottery make less than $55,000 per year. While that group may not all be classified specifically as “poor,” they definitely are in the bottom half of all income earners in America. More, this group spends a disproportionate amount of their income on lottery tickets. Put another way, $2 on a ticket once a week is nothing to someone who makes $125,000 per year, but to someone who makes just $20,000 it’s a lot of money.
Who Spends Lottery Money?
|Total Lottery Money 2015||$73,000,000,000|
|Income Above $55,000||$32,120,000,000|
|Income Above $55,000||$24,090,000,000|
|Income Below $25,000||$16,790,000,000|
Eskimos Don’t Buy Ice
One final point about the poor and lottery money: of course it makes sense that lower income consumers buy the most tickets. After all, they’re the ones most in need of what the lottery is selling: a ticket out of the rat race.
Also see: 15 Best Travel Credit Cards
How Much Lottery Money Do People Get to Keep?
Lottery winners keep about a third of everything they win. The chart above shows how a $1 million jackpot gets eaten up by taxes and other subtractions. The first big hit comes if the winner takes the money in a lump sum. The $1 billion jackpot only holds if the money is taken as a 30-year annuity. If the money is taken entirely up front, it instantly loses about 38%, chopping it down to $620 million. Since lottery money is taxed as regular income, it lands in the highest U.S. bracket of 39.6%. That means another big chunk taken out, deflating the winnings down to $374 million.
Location, Location, Location
State and local taxes are trickier to figure because they depend on where the winner lives. For instance, a resident of California who wins $1 billion will pay that state’s highest income tax rate of 13.3%. Once local taxes are added in that can jack up as high as 15%. Residents of Florida, Texas or other tax free states don’t see state taxes on a lottery win at all. Taking a middle-of-the-road figure, the typical lottery winner will see his or her $1 billion jackpot whittled down to just $312 billion after all taxes and subtractions are accounted for. Most lottery winners wouldn’t use this as an excuse to cry poverty as it’s still plenty of money.
Lottery Money: How Much Do We Keep?
|After Lump Sum Subtraction||$620,000,000|
|After Federal Tax||$374,480,000|
|After State/Local Tax||$312,480,000|
Is the Lottery Really a Tax on Stupidity?
It’s been said that the lottery is a tax on stupidity. A case can certainly be made for this way of thinking. The odds of winning the lottery are smaller than those of getting struck by lightning. The NASPL disputes this, but the data they show represent the odds of getting killed by a lightning strike, which are much lower than simply getting struck. Taken as an investment, the return on a lottery ticket is guaranteed to be zero. That being the case, it is foolish to put money into lottery tickets.
There’s another way to look at lottery money though. Though money spent on the lottery is highly unlikely to see a return, it still gives people a lot of fun. Someone who spends $2 on a lottery ticket can have a lot of fun talking to friends and family about it and dreaming about what they’d do with the money. Seen that way, the money isn’t wasted at all. The real problem instead comes when the spending becomes habitual, or when that $2 turns into $20 or $50 a week.
Better Ways to Spend Lottery Money
There are several better things to do with lottery money than spending it on tickets. Here are a few:
- Pay down credit card debt. Credit card debt comes with high interest rates that can keep people poor. That’s why billionaires like Warren Buffett routinely speak out against credit card debt.
- Invest in a 401(k). Money put into a 401(k) goes in tax free and grows over time.
- Invest in an IRA. IRAs are like 401(k)s except that they’re not tied to an employer.
- Put the money into a 529 College Savings Plan. Saving for a child’s college tuition is a great alternative to spending the money on lottery tickets.
What to Do if You Win the Lottery
People who win big lottery money should take some steps to make sure they don’t wind up with a jackpot-sized nightmare:
- Protect the ticket in a safe deposit box after creating a few digital copies.
- Don’t make any rash decisions. Quitting a job based on a lottery win might result in a bad dream later on. A simple mistake can mean crawling back to work with egg on your face.
- Hire professional money managers. Tax lawyers, CPAs and financial planners are all trained to make sure your money stays safe. After a lottery win, hiring financial pros is one of the smartest decisions anyone can make.
- Decide whether to take a lump sum or an annual payment. Lump sums are guaranteed money and can grow a lot from wise investment. Annuities are guaranteed money over time and pay off the full amount rather than a percentage.
- Pay off all debt before spending on anything else.
- Give to charity.
How Much Lottery Money Goes Unclaimed
According to app developer Brett Jacobson, over $2 billion in lottery money goes unclaimed every year. Chances are good that the $2 billion isn’t from big jackpot winners but from winners of smaller prizes who don’t know about the nine ways to win Powerball. Jacobson’s Lotto Lotto app scans each lottery ticket as it’s purchased, then monitors all winning numbers to see if the ticket wins any money at all. When a winning combination is spotted, the app instantly sends an alert telling the consumer about the win.