How Does a Lottery Work?
How Does a Lottery Work?

About the Lottery

The lottery is a type of gambling run by the state. In most states, there are several games to play. With scratch-off games, players win prizes instantly; there are also daily games and games that require you to pick several numbers. Lotto often refers to the game with the largest prize. To win, you must pick six correct numbers from a set of balls numbered from 1 to 50, although a few games use slightly more or less.

Odds of Winning

For the typical lotto, a player selects six numbers from 50 possible balls. It doesn't matter how the numbers are arranged. Statistically, this translates to odds of picking one correct number to 50/6, the equivalent of 8.33 to 1. Therefore, the odds of drawing the next ball decrease slightly. They then become 49/5 or 9.8:1. For the last ball, the odds are much less, as there are now 45 balls to 1.

Some states are varying the number of balls to change the odds. With odds too easy, players win the jackpot on a regular basis and the prize cannot grow. Large jackpots drive ticket sales. If the jackpot isn't large enough, ticket sales decrease. Conversely, if the odds against winning are too high, again, ticket sales decrease. Each state must find a proper balance between the odds and the number of people playing.

Payments

If you win the lottery, how much will you receive? We'll use the New York State lotto for our example. If you chose a series of yearly payments when the ticket was purchased, what you've really won is 26 yearly payments that add up to $10 million. Taxes are always taken from each check. The initial check would be for 2.5 percent of the total or $250,000. Every year, the value of the check increases by 1/10 of 1 percent. Your last check would be 5 percent, or $500,000. The typical payment option ends up costing New York slightly less than half of the full jackpot amount.

Approximately 80 percent of the winners chose the lump sum option, which is about half the full jackpot amount. Because of this, the bonds the state purchase to ensure the game's winners receive their funds and never mature, costing the winner half the jackpot. Most winners choose the lump sum option to more appropriately invest, to do slightly better than the 5 percent interest that the state's bonds would produce.

Taxes

Winning $5 million isn't a bad figure, but the government takes a big cut as well. American lotteries take between 28 and 39.6 percent, depending on the amount won. With state and local taxes still taken and if you chose the lump sum option, you'll end up with roughly a quarter of the amount you started with, or $2.5 million.