The Lottery Curse
In March 1995, a used car trader named Lee Ryan won the lottery for £6,527,880. At the time, he lived in public housing built by local authorities in Braunston, England with his girlfriend and their three children. After getting married that summer, he spent £1 million on a country mansion and a variety of cars including a Bentley, Ferrari, Porsche, and BMW. He also bought two Ducati superbikes, a £125,000 plane, and a £235,000 Bell JetRanger helicopter. His entire life had been turned around. He had “prayed to God to make him a millionaire” while he had been serving a prison sentence for stealing cars, and it seemed that his desires had come to fruition. However, his life of joyful lavishness later faded as he and his wife split in 2003, and he lost about £2 million in failed business ventures and property investments. After countless losses, he eventually chose to reside in a rented flat in South London with homeless lodgers. In regards to the lottery, he claimed “the money was cursed” (Charlton 2014).
Lee Ryan’s story regarding his fall from riches is not uncommon. There are numerous similar stories of lottery winners who won millions only to have it ruin their lives in the end. Hence, the idea of the lottery curse was created. With billions of people clambering to make their dreams come true and become millionaires, it is a wonder how so many of the winners end up worse off than before they had won. According to the Certified Financial Planner Board of Standards, nearly a third of lottery winners declare bankruptcy (Edelman 2016). Given that the lottery is so renowned, it is intriguing to consider how little the majority of us know regarding the actual process and rules as well as the real consequences that have been typical of so many winners’ circumstances. Lottery winners are faced with multiple tax withholdings reducing their winnings, a bombardment of begging by friends, families, charities, coworkers, neighbors, and even strangers for money, and a strong temptation to spend the seemingly boundless winnings. All in all, winning the lottery may not be as magical as it seems.
It is important to first elucidate the options that lottery winners have to redeem their winnings. Winnings can be received either as a one-time lump sum cash payment or as an annuity over a certain number of years. In terms of the lump sum payment, winners receive the “cash value” which is generally about half of the total jackpot amount. More specifically, the cash value can be estimated by taking the starting cash amount of the jackpot and adding the proceeds of the tickets purchased for the specific drawings (Malesky 2017). These winnings are taxed up-front. On the other hand, the winnings can also be received through annual payments over time, generally for around 20-30 years. The lottery agency invests the cash value of the winnings in various financial instruments such as bonds that earn interest to pay these installments. As a result, increasing installments are paid to the winner rather than simply distributing the cash value over time, thus allowing for the winnings to reach the advertised jackpot value (Malesky 2017). In this case, taxes are paid at lesser amounts each year as taxes are paid on each installment as distributed (Wattles 2016). Although it can be enticing to receive the entire prize up-front, receiving the winnings over time through an annuity has considerable advantages to maximize the amount of winnings. Choosing the annuity option can also restrict the temptation to spend the jackpot immediately and place the responsibility of investing the money on the lottery company. However, many winners can have success taking the lump sum payment and either investing individually or meeting with financial advisors of their own choosing to grow their winnings.
Lottery winnings are considered ordinary taxable income for tax purposes. Currently, the IRS taxes the top income bracket at 37% (Wells 2021). Assuming that you win a $1 million prize and choose to accept the prize up-front as a lump sum, you would receive the cash value reduced by the taxes described previously. Since the cash value has been estimated to be about half of the advertised jackpot value, the $1 million prize would result in a lump sum of about $700,000 (since cash values have tended to be slightly more than 50% of the jackpot amount) which would be reduced to $441,000 due to taxes of $259,000. Winners are also subject to state and local taxes. Although not all states impose a withholding tax rate, for those that do, the rates range from 2.90% to 8.82% as of 2021 leading to a total tax rate ranging from 39.90% to 45.82% (World Population Review 2021). Therefore, the resulting take-home winnings would range from approximately $402,104 to $428,211. The hypothetical situation uses a jackpot amount much smaller than typical prizes of lotteries. In addition, the exact tax rates that should be applied and other aspects which further complicate the final take-home winnings are somewhat unclear. Regardless, the estimation still exemplifies that a considerable amount gets taken due to multiple levels of tax withholdings. Realistically, despite a significant amount being deducted due to taxes, jackpots can be $100 million and even reach $1 billion, leaving the winner with plenty of money.
Once someone has won the lottery, their spending potential becomes seemingly limitless and they are thrown into a world that they have not seen before. Although the best choice is to contact financial experts and discuss how to invest the winnings properly and set aside specific amounts for personal spending, it can be easy to take advantage of the new financial freedom they could only previously dream of. Many lottery winners decide to spend lavishly on new houses, cars, jewelry, technology, clothing, and more. As they do, the people around them easily take notice of their newfound riches. Suddenly, family, friends, coworkers, and neighbors are asking for a small bit of money, rationalizing it as only a sliver of what the lottery winner received. However, giving in to the demands starts a chain reaction in which others begin to ask for money as well and the so-called small amounts begin to add up. If they refuse to provide money, rationalization and polite asking can quickly turn into guilt-tripping, manipulation, or blackmail. Relationships can be broken as people become twisted due to their greed. As a result, many lottery winners have severed and badly damaged relationships, and they can become increasingly paranoid and pessimistic regarding the true nature of the people around them. It can become difficult to trust others and safety can become a concern in more dangerous scenarios. It seems that whichever path is taken when spending their winnings, a domino effect occurs in which winners are met with only unfortunate consequences.
The natural response would likely be, why not just remain anonymous? Only 11 states allow lottery winners to remain anonymous including Arizona, Delaware, Georgia, Kansas, Maryland, New Jersey, North Dakota, Ohio, South Carolina, Virginia, and Texas (Solomon 2021). In 2013, New Jersey governor Chris Christie vetoed a bill that would have let lottery winners remain anonymous for a year, despite the overwhelming support for the bill (Grauschopf 2020). It seems like a pointless and purposefully punitive rule considering that anonymity may potentially prevent many winners from being recognized and facing the consequences described earlier. However, Chris Christie explained that the bill, as well as anonymity, could “undermine the transparency that provides taxpayers confidence in the integrity of the Lottery and its games. Moreover, the bill could have the unintended consequence of reducing Lottery sales by hampering marketing efforts and the public excitement generated when Lottery winners are announced” (Grauschopf 2020). Although the initial bill was vetoed, in 2020, New Jersey governor Phil Murphy signed a law providing lottery winners the option to remain anonymous (NBC Philadelphia 2020). Nevertheless, the reasoning behind the veto of the first bill has some validity. Without publicity providing authenticity to the lottery process, many would likely question the integrity of the lottery and perhaps think of it as rigged. Still, the laws make it difficult for lottery winners to enjoy their winnings privately.
Given all of these considerations, winning the lottery is not as magical as many people might think. After taking a huge chunk through tax withholdings, the winnings are not as enormous as the advertisements make them seem. Furthermore, winners are constantly bombarded with people begging for money, therefore ruining relationships and potentially limiting winners from genuinely enjoying their winnings. However, the so-called lottery curse is no more than a myth. Although many winners have succumbed to overly lavish spending and used their fortune irresponsibly, others have been able to remain anonymous, responsibly invest their money, and enjoy their newfound financial freedom. It can be fun to imagine what we would do if we won the lottery, but the best choice is to meet with financial advisors to invest the winnings and put aside specific amounts for personal spending. According to Lottery USA, the odds of winning the Mega Millions jackpot are 1 in 302.6 million and 1 in 292.2 million for the Powerball jackpot (Gill 2021). If you’re lucky enough to win the lottery, hopefully, you know to spend and invest responsibly and not fall victim to the so-called lottery curse.
Works Cited:
Charlton, C. (2014, November 11). My £6.5m lottery curse: Lotto Lag Lee Ryan blew the lot on helicopter, Ferrari and a country mansion, but says he's happier now on £10,000 a year. https://www.dailymail.co.uk/news/article-2829793/Lotto-lag-Lee-Ryan-reveals-s-blown-6-5million-1995-jackpot-win-flashy-cars-mansion-lives-tiny-flat-South-London-homeless-lodgers.html.
Edelman, R. (2016, January 15). Why So Many Lottery Winners Go Broke. https://fortune.com/2016/01/15/powerball-lottery-winners/.
Gill, A. (2021, January 13). 5 things more likely to happen than winning the $750M Mega Millions jackpot. https://www.wtsp.com/article/money/winning-lottery-likelihood/67-13d86b43-c493-422e-9b84-0465b543b0df#:~:text=According%20to%20Lottery%20USA%2C%20the,are%20more%20likely%20to%20happen.
Grauschopf, S. (2020, July 27). Which States Allow Lottery Winners to Remain Anonymous? https://www.thebalanceeveryday.com/states-allowing-lottery-winners-to-remain-anonymous-4165435.
Malesky, M. (2017, July 27). Cash Value vs. Annual Payments. https://pocketsense.com/cash-value-vs-annual-payments-12135588.html.
NBC Philadelphia. (2020, January 22). New Jersey Lottery Winners Now Can Remain Anonymous. https://www.nbcphiladelphia.com/news/local/new-jersey-lottery-winners-now-can-remain-anonymous/2277847/.
Solomon, A. (2021, February 5). Can lottery winners remain anonymous? https://www.benefitspro.com/2021/02/05/can-lottery-winners-remain-anonymous-412-110766/?slreturn=20210512143321.
Wattles, J. (2016, January 12). You won the $1.5 billion Powerball! Here's your tax bill. https://money.cnn.com/2016/01/08/pf/taxes/powerball-jackpot-tax-bill/.
Wells, L. (2021, February 12). 2020-2021 federal income tax brackets and rates. https://www.bankrate.com/finance/taxes/tax-brackets.aspx.
World Population Review. (2021). Taxes On Lottery Winnings By State 2021. https://worldpopulationreview.com/state-rankings/taxes-on-lottery-winnings-by-state.
