Wednesday’s Powerball winner will be penalized more than any other in the past two decades if they choose to accept their winnings as a lump sum.
When someone wins the lottery, they usually have two options on how to 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 chooses a lump sum payment, as nearly 98 percent of past winners have, they will receive about $757 million immediately.
That may be a lot of money, but as a percentage of the advertised jackpot amount, it’s the lowest it’s been since at least 2003, just 44 percent.
On January 21, the winner of the $730 million jackpot paid out a whopping $550 million. So the lump sum was 75 percent of the advertised jackpot
Every time Fed Chairman Jerome Powell raises interest rates and indirectly raises the yield on 30-year Treasury bonds, he inadvertently increases the size of lottery jackpots
By comparison, in January 2021, the winner of the $730 million Powerball jackpot paid out a whopping $550 million — or about 75 percent.
The explanation for this lies in how the full jackpot amount is calculated.
The amount advertised by the Powerball as the jackpot is not the amount the lottery has in a prize pool and can pay to the winner.
“The cash value is really what Powerball has on hand,” said Jared James, the founder Lotto Edgewhich offers insights into various lotteries.
‘All they do with the annuity is invest that money for you. So if interest rates are higher, they can put it in an investment that is going to give a higher return than it would have a few years ago,’ he said.
The advertised jackpot is therefore the amount you would get if the prize pool was invested in a portfolio of Treasury bonds for 30 years.
As a result, every time Fed Chairman Jerome Powell raises interest rates and indirectly raises the yield on 30-year Treasury bonds, he inadvertently increases the size of lottery jackpots.
The terms of the annuity then stipulate that the amount is paid to the winner in 30 annual payments, which grow in size by 5 percent each year.
Although the initial annuity payment is not disclosed by the Powerball, in the case of the Mega Millions lottery, it is approximately 1.5 percent of the jackpot amount.
For example, in the case of Wednesday’s $1.73 billion jackpot, the first payout will be around $26 million. Each year for the next 30, the winner will be paid the same amount plus 5 percent.
In year 10, they would receive about $40 million and their final payment would be about $107 million. At that point, the total amount they ever received over the thirty years would be approximately $1.73 billion.
However, come 2053, when the winner is paid their final installment, the dollar is expected to have less purchasing power due to inflation.
On Wednesday, just 44 percent of the advertised $1.73 billion jackpot will be available as a lump sum. This is the lowest it has been since as far back as 2003
The advertised jackpot is therefore the amount 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 took the lump sum and invested it themselves, they would only need an annual interest rate of about 3 percent, assuming it compounds, to outperform the annuity.
While ‘conventional wisdom’ says that independent investing would be wisest, James suggested that the annuity option might be suitable for winners with less self-control and financial discipline.
“All of a sudden you’re not investing every dollar, you’re not compounding every year. You’re really 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 been chosen only about five times, according to data from Powerball.net, which provides independent Powerball news.
This in turn increases the amount of people buying tickets, as inflated jackpots generate more excitement around the lottery and more ticket sales.
Lotto Edge conducted a study that found that only when the advertised jackpot reaches the billion dollar mark does it actually see an increase in ticket sales.
According to James, bigger 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,” James said. Both of these factors increase the size of jackpots.
Although the Powerball odds are extremely poor, James suggested that those who want to play for the thrill of it should be wise and avoid spending more than $10 or so on tickets.
“You’re really taking astronomical odds to win an astronomical prize,” he said.