My Plan for Mega Millions Lottery Jackpot Investment

My Plan for Mega Millions Lottery Jackpot Investment

Mega Millions Jackpot

Our national frenzy over the Mega Millions jackpot, set to reach an astounding $1.55 billion in Tuesday’s drawing, would surely have amused Ambrose Bierce. Bierce, an overlooked American writer, famously quipped that the lottery is “a tax on people who are bad at math.” Known for his acerbic wit, Bierce may have been considered hilarious in 1911, but I beg to differ when it comes to the lottery.

While the majority of people buying Mega Millions tickets are not statisticians, they instinctively understand their slim chances of winning. They know deep down that the odds of guessing all six numbers correctly, at 1 in 302.6 million, are effectively zero. Even if you were to inform them that they are more likely to be attacked by a dog (odds: 1 in 58,843) than hitting the jackpot, they would probably be more concerned about their pet cat plotting their demise while they sleep.

But that’s not what the lottery is about for most people. Remember the tagline “a dollar and a dream?” It’s all about indulging in a little reverie. Personally, I am well aware that winning the Mega Millions is highly unlikely. Yet, like many others, I find myself irrationally fantasizing about the possibility. Until someone eventually wins, why not entertain the thought that it could be me?

Now, let’s delve into the real purpose of this article – illustrating how even a small amount of interest earned on a substantial sum of money can create tremendous income. And when the miracle of compounding is factored in, the results are mind-boggling. There’s a famous finance joke about compounding: “How do you make a great ANBLE on Wall Street? Start with a small one.” The ultimate winner of the Mega Millions jackpot will possess a lot more than a small ANBLE.

As mentioned earlier, the projected Mega Millions jackpot will exceed $1.55 billion, with a lump sum payout of approximately $757.2 million after taxes. While federal and state taxes will significantly reduce the final sum, the winner will still walk away with an awe-inspiring amount of cash. For the sake of simplicity, let’s assume they take home an even $500 million.

Pause for a moment and contemplate that number – half a billion dollars, in cash, after taxes. Such a sum catapults you not just into the top 1% but into the fraction-of-the-1%. In financial terms, you are now classified as an ultra-high-net-worth individual, a whale.

With such a momentous windfall, how should one invest these hundreds of millions of dollars? Here’s the serious answer: hire professionals. Seek out comprehensive wealth management services that can handle everything from planning to accounting, taxes, and legal matters. Private bankers, various wealth managers, registered investment advisors catering to ultra-high-net-worth clients, or family offices that offer all-in-one services for the super-rich, will compete for your business.

Undoubtedly, it’s a nice problem to have, but it is still a problem. And we must never forget the age-old adage: more money, more problems.

Now, let’s consider the laziest and easiest way to invest such a vast sum of money – Treasury securities. Treasury securities are one of the safest investment options available. The risk of default is minimal, and if you hold them to maturity, you needn’t worry about interest rate fluctuations. Although inflation is a valid concern, it can be managed by creating a bond ladder strategy.

Moreover, income earned from Treasury securities is not subject to federal tax. Currently, short-term government debt yields significantly more than long-term debt, a situation that will inevitably change in the future. As of August 4, 1-month Treasury bills were yielding 5.54%. While the exact yield may differ due to secondary market prices or auction rates, let’s indulge in some arithmetic for fun.

At a yield of 5.54%, lending the federal government $500 million for a month would generate an income of $27.7 million. That’s a hefty payday for relatively passive investment. It’s no wonder Warren Buffett, CEO and chairman of Berkshire Hathaway, favors short-term Treasurys for his company’s cash holdings.

Moving further down the yield curve, the benchmark 10-year Treasury note yielded 4.05% as of August 4. At this rate, a $500 million investment would generate $10,125,000 in income every six months for the next ten years. This would result in the government returning the original $500 million at the end of the decade.

The crucial point to grasp here is that even a mere 3% coupon on “only” $100 million worth of bonds would yield $3 million in annual income. Regardless of what I ultimately decide to do with my Mega Millions millions, my focus would be on the return OF my principal, not the return ON my principal. When you have $500 million at your disposal, even low returns generate immense sums. Less risk may imply less reward, but once you’ve won the jackpot, how much more reward do you truly need?

[ANBLE: Annual Net Base Lending Earnings]