Nueva York (Trends Wide Business) — One of the reasons for the record $1.9 billion Powerball jackpot being drawn on Monday night is something you wouldn’t expect: the recent run of sharp interest rate hikes from the Federal Reserve.
That’s because the advertised jackpot size of $1.9 billion is the amount winners would get in 30 equal payouts of around $63 million spread over the next 29 years. Those payments come from an annuity purchased by lottery sponsors and the payments take into account an average rate of return.
But the point is that the actual prize is much more likely to be a much smaller lump sum, the “cash value” — in this case $929.1 million — which is never widely advertised.
“The only thing that is talked about is the annualized prize,” said Victor Matheson, a professor of economics and accounting at the College of the Holy Cross in Massachusetts. “It is the number that lotteries sell. It is the number of the news. But it is the number that almost nobody takes”.
No Powerball winner since 2014 has chosen the “larger” annuity amount over the cash prize.
The cash value is the amount the prize would actually cost the lottery, either in a one-time payment now or to purchase an annuity to make those 29 payments later. The current climate of rising interest rates has opened the door to ever-increasing annuity payments.
With the low interest rates of recent years, the advertised annuity price was only 50% to 60% higher than the cash value, or sometimes less.
The biggest Powerball jackpot ever won was in January 2016, when three lucky people split an advertised $1.586 million jackpot. They each took their share of the cash value, which totaled $983.5 million, which was $54.4 million more than the cash prize in Monday’s “record” drawing.
The record annuity prize announced at the time was 61% greater than the cash prize. This time, the estimated annual prize is 104% higher than the cash prize. If it were the same proportion as in 2016, this Monday’s annuity prize would be only $1.5 billion.
And if interest rates were as low as they were in January of this year, this Monday’s annuity rate would be just $130 million.
The current award assumes a return on cash value of about 5.75% per year, Matheson said.
But even a conservative investor could probably do better by taking the money up front and investing it, despite fluctuations in the stock market. The Standard & Poor’s 500 is up 728% in the 29 years since October 1993, or an average compound annual growth rate of about 7.5%.
The higher assumed return associated with Monday’s annuity prize could make it more attractive to the next big winner or winners, Matheson said.
On the other hand, a disinclination to accept deferred gratuity could outweigh any investment or tax planning assumptions that go into the winner’s calculations.
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Nueva York (Trends Wide Business) — One of the reasons for the record $1.9 billion Powerball jackpot being drawn on Monday night is something you wouldn’t expect: the recent run of sharp interest rate hikes from the Federal Reserve.
That’s because the advertised jackpot size of $1.9 billion is the amount winners would get in 30 equal payouts of around $63 million spread over the next 29 years. Those payments come from an annuity purchased by lottery sponsors and the payments take into account an average rate of return.
But the point is that the actual prize is much more likely to be a much smaller lump sum, the “cash value” — in this case $929.1 million — which is never widely advertised.
“The only thing that is talked about is the annualized prize,” said Victor Matheson, a professor of economics and accounting at the College of the Holy Cross in Massachusetts. “It is the number that lotteries sell. It is the number of the news. But it is the number that almost nobody takes”.
No Powerball winner since 2014 has chosen the “larger” annuity amount over the cash prize.
The cash value is the amount the prize would actually cost the lottery, either in a one-time payment now or to purchase an annuity to make those 29 payments later. The current climate of rising interest rates has opened the door to ever-increasing annuity payments.
With the low interest rates of recent years, the advertised annuity price was only 50% to 60% higher than the cash value, or sometimes less.
The biggest Powerball jackpot ever won was in January 2016, when three lucky people split an advertised $1.586 million jackpot. They each took their share of the cash value, which totaled $983.5 million, which was $54.4 million more than the cash prize in Monday’s “record” drawing.
The record annuity prize announced at the time was 61% greater than the cash prize. This time, the estimated annual prize is 104% higher than the cash prize. If it were the same proportion as in 2016, this Monday’s annuity prize would be only $1.5 billion.
And if interest rates were as low as they were in January of this year, this Monday’s annuity rate would be just $130 million.
The current award assumes a return on cash value of about 5.75% per year, Matheson said.
But even a conservative investor could probably do better by taking the money up front and investing it, despite fluctuations in the stock market. The Standard & Poor’s 500 is up 728% in the 29 years since October 1993, or an average compound annual growth rate of about 7.5%.
The higher assumed return associated with Monday’s annuity prize could make it more attractive to the next big winner or winners, Matheson said.
On the other hand, a disinclination to accept deferred gratuity could outweigh any investment or tax planning assumptions that go into the winner’s calculations.
