One of the reasons for the record $1.6 billion jackpot for Saturday night’s Powerball draw is something you wouldn’t expect – the recent string of steep rate hikes by the Federal Reserve.
That’s because the size of the advertised grand prize of $1.6 billion is the amount that winners would receive, which is the taking of 30 equal payments of approximately $53 million spread over the next 29 years, contains. These payments come from an annuity purchased by the lottery sponsors and the payments take into account an average rate of return
But the thing is, the real prize is far more likely to be a much smaller lump sum, the “cash value” — in this case, $782.4 million — which never gets attention.
“All anyone ever talks about is the pension price,” said Victor Matheson, professor of economics and accounting at the College of the Holy Cross in Massachusetts. “It’s the number of the lottery market. It’s the number on the news. But it’s the number almost nobody ever takes.”
No Powerball winner since 2014 has chosen the “bigger” annuity amount over cash prize.
Present value is the amount that winning would actually cost the lottery, either in the form of a lump sum payment now or to buy an annuity to make those 29 subsequent payments. The current environment of rising interest rates has opened the door to higher and higher pension payments.
In the low-interest environment of recent years, the advertised annuity price was only about 50% or 60% above the present value, sometimes even below.
The current annuity award surpasses the record set in January 2016, when three winners shared an advertised $1.586 billion award. Each took their share of the cash value, which totaled $983.5 million, $200 million more than the cash prize in Saturday’s “record” drawing.
The advertised bond price was then 61% higher than the cash price. This time, the estimated bond price is 104% higher than the cash price. If it were the same ratio as in 2016, Saturday’s bond price would be just $1.26 billion.
The current price assumes a return on present value of about 5.75% per year, Matheson said.
But even a conservative stock investor could probably do better by taking the money upfront and investing it, regardless of stock market fluctuations. The standard & Poor’s 500 is up 728% in the 29 years since October 1993, for a compound annual compound growth rate of about 7.5%, according to Matheson.
On the other hand, a reluctance to accept a deferred reward might override any investment assumptions or tax planning that go into the winner’s calculations.
The CNN wire™ & © 2022 Cable News Network, Inc., a Warner Bros. Discovery company. All rights reserved.
https://6abc.com/powerball-drawing-lottery-saturday/12420404/ Powerball: Why is the jackpot prize at a record? Thank Federal Reserve Chairman Jerome Powell