A $370M Lottery Jackpot and A Story of a Lottery Winner

I noticed a lot of coverage today about the $370M Mega Millions Lottery jackpot. I found some of the trivia in the coverage interesting, like:

The odds of picking the six correct numbers and taking home the mountain of cash are 1 in 175,711,536. That’s “175,” as in millions. Those odds are even worse than one of those carnival booths where you pitch a dime and try to get it to land on a piece of glass.

1 in 175,711,536. Astonishingly small. Of course, it’s $1 per ticket, and with a $370 Million jackpot, it seems like the expected value of a ticket would be higher than $1… assuming that you don’t end up splitting the pot with someone else.

Personally, I’ve never been a big fan of the lottery. I do have a little libertarian voice in my head that says, “Go ahead. If people want to gamble, it’s their money.” Of course, I have this other voice, call it my nagging sense of social justice that says, “This is just a regressive tax on people who are bad at math or have a low-level gambling addiction.”

I never play, which is why when I ask my wife,

“What would you do if we won the lottery?”

She tells me,

“You have to play to win, honey. You have to play to win.”

In any case, I’ve always been fascinated with the stories of lottery winners who blow many lifetimes worth of money in a matter of years. Similar to professional athletes who blow fortunes after they retire, I’ve always felt that these cases prove that no amount of money can substitute for being educated in personal finance, and being prudent with money.

Well, there is an inspirational story here of a lottery winner who actually handled his money well. Graceful Flavor, which I typically read for Apple-related news, had a nice write-up on this story. The original article actually breaks down what this winner spent his money on:

  • $45 million: Safe, low-risk investments such as municipal bonds
  • $35 million: Aggressive investments like oil and gas and real estate
  • $1.3 million: A family foundation
  • $63,000: A trip to Tahiti with 17 friends
  • $125,000: Mortgage retired on his 1,400-square-foot house
  • $18,000: Student-loan repayment
  • $65,000: New bicycles, including a $12,000 BMC road bike
  • $14,500: A used black VW Jetta
  • $12,000: Annual gift to each family member

Let’s just walk down the understated brilliance of how this man, Brad Duke, actually allocated his money after winning a $220 Million jackpot. You see, Brad spent time researching the stories of other lottery winners, and I think there are lessons here for all of us who may (hopefully) be faced with a small windfall someday.

  1. Municipal Bonds. This is exactly right. Largely risk-free, this guarantees Brad a tax-fee investment that will provide regular income, indefinitely, and will likely match inflation over time. This provides a wonderful base of income for him, indefinitely.
  2. Aggressive investments. This is likely his riskiest endeavor, but with a base level of income guaranteed, he has freedom here to be more aggressive, and try to scale his assets over time.
  3. Family Foundation & Gifts. Nice clear breakout of what he’ll be giving to charity, and gifts to family members. Note the lack of family members “on the payroll” – a sure-fire track to the money problems.
  4. Trip to Tahiti & Bicycles. You have to celebrate. $128K is not a large amount here, and it represents some fun with the winnings. Most personal finance experts agree that if you try to save every single dime, you can end up feeling deprived, and it can lead to impulsive behavior. This trip sounds like a great way to have fun, do something extravagant
  5. Student Loan & Mortgage Paid Off. In the world of debt, student loans and mortgage are the best possible forms of leverage. Low interest, with tax advantages, and typically a large payoff on the investment. Still, once you have ample assets, reducing debt reduces risk. It’s that simple.
  6. The Used Jetta. This is probably what impresses people the most. He sold his 2005 car, and bought another used car! This is a good sign of someone who isn’t frugal because they have to be, but because they just don’t like to waste money.

It’s hard to say what you might do with a windfall of $100,000 or $100,000,000. Oh, I guess it’s easy enough to guess, but I have a feeling that reality is always more complicated than idle dreams.

Living in Silicon Valley, it is not uncommon to have friends and family who come across fairly large windfalls. A company goes public, or is sold. A relative passes on an inheritance. The fact that so many people who have large windfalls in their lives end up losing the money in short order is a warning. Managing money is difficult, and the right habits and the right attitude towards it will likely benefit you at any asset level.

Of course, you do have to play to win.