Wednesday’s Powerball winner will be penalized more than any other in the last two decades if they opt for to accept their winnings as a lump sum.
When somebody wins the lottery they generally have two options as to how they can claim their prize money.
Either they accept a lump sum, which is paid to them immediately, or they claim the full ‘headline’ jackpot amount, which will be paid to them in annuities over the next 30 years.
If the winner of Wednesday’s $1.73 billion Powerball opts for a lump sum payment, as nearly 98 percent of winners have in the past, they will receive around $757 million immediately.
That may be a lot of money, but as a percentage of the advertised jackpot amount it’s the lowest its been since at least 2003, just 44 percent.
In January 21, the winner of the $730 million jackpot cashed out a whopping $550 million. The lump sum was therefore 75 percent of the advertised jackpot
Each time chair of the Fed, Jerome Powell, raises interest rates and indirectly increases the yields on 30-year Treasury bonds, he is inadvertently increasing the size of lottery jackpots
By comparison, in January 2021, the winner of the $730 million Powerball jackpot cashed out a whopping $550 million – or around 75 percent.
The explanation for this lies in how the full jackpot amount is calculated.
The amount advertised by the Powerball as being the jackpot is not the amount the lottery has in a prize pool and able to pay to the winner.
‘The cash value is really what Powerball has on hand,’ said Jared James, the founder Lotto Edge, which provides insights to various lotteries.
‘All they’re doing with the annuity is investing that money for you. So if interest rates are higher, they can put it in an investment that’s going to yield a higher return than it would have a couple of years ago,’ he said.
The advertised jackpot is therefore the amount that you would get if the prize pool was invested in a portfolio of Treasury bonds for 30 years.
As a result, each time chair of the Fed, Jerome Powell, raises interest rates and indirectly increases the yields on 30-year Treasury bonds, he is inadvertently increasing the size of lottery jackpots.
The terms of the annuity then dictate that the sum is paid to the winner in 30 annual payments, growing by 5 percent in size each year.
Although the initial annuity payment is not disclosed by the Powerball, in the case of the Mega Millions lottery it is around 1.5 percent of the jackpot amount.
For example, in the case of Wednesday’s $1.73 billion jackpot, the first payment would be around $26 million. Each year for the next 30, the winner will be paid the same amount plus 5 percent.
On year 10 they would receive around $40 million and their final payment will be around $107million. At that point the total amount they ever received over the thirty years would be around $1.73 billion.
However, come 2053, when the winner is paid their final installment, the dollar is expected to have less buying power due to inflation.
On Wednesday, just 44 percent of the advertised $1.73 billion jackpot will be available as a lump sum. That is the lowest it has been since as far back as 2003
The advertised jackpot is therefore the amount that you would get if the prize pool was invested in a portfolio of Treasury bonds for 30 years
If the winner of Wednesday’s lottery were to take the lump sum and invest it themselves, they would only need an annual interest rate of around 3 percent, assuming it compounds, to outperform the annuity.
While ‘traditional wisdom’ states that investing independently would be wisest, James suggested that the annuity option may be appropriate for winners with less restraint and financial discipline.
‘All of a sudden, you’re not investing every dollar, you’re not compounding every year. You’re actually just taking money out,’ he said.
Of the roughly 239 times the Powerball has been won since 2003, the annuity method of receiving the full jackpot has only been chosen around five times, according to data from Powerball.net, which provides independent Powerball news.
That in turn increases the amount of people that buy tickets since inflated jackpots generate more excitement around the lottery and more ticket sales.
Lotto Edge carried out a study which found that only once the advertised jackpot reaches the billion dollar mark does it really see ticket sales spike.
According to James, larger jackpots have become a feature of the game, not only because of high interest rates, but also because of changes to the game.
‘They made two fundamental changes to how Powerball was done. They increased the number of combinations and they doubled the ticket price,’ said James. Both those factors increase the size of jackpots.
Although the Powerball odds are exceedingly poor, James suggested those wanting to play for the thrill of it should be sensible and avoid spending more than $10 or so on tickets.
‘You’re really taking astronomical odds to win an astronomical price,’ he said.
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