The USA Mega Millions and Powerball lottery games regularly offer jackpots that grow to hundreds of millions of dollars. Sometimes, the jackpot rises to billions, like in 2016, when the Powerball winners across three states won almost $1.6 billion. It sells its lottery tickets in 45 states, U.S. Virgin Islands, District of Columbia, and Puerto Rico, which makes the lottery accessible to most of the country.
But the odds winning a jackpot are astronomical, and currently stand at 1 in 292.2 million. However, if you do, your Powerball payout options are two: as an annuity or a lump sum. So, which option gives you more money? In a way, the payouts are actually the same.
Powerball Annuity Option
Whenever you see a Powerball jackpot amount advertised, the figure they use represents the amount that would be paid out as an annuity – a series of 30 payments spread out over time. If you win a jackpot of, say, $150 million, that means 30 payments that will add up to $150 million, before taxes are taken out. You get the first payment immediately, and the rest come at one-year intervals, so the money is paid out in the 30 graduated payments over a 29-year period.
Powerball Annuity Growth
Powerball structures a winner's annuity so that each annual payment will be five percent larger than the previous payment. The lottery says it does this to help winners "keep up with inflation," although it works out to Powerball's benefit, as you'll see.
So, if you take a $150 million jackpot as an annuity, you won't get 30 payments of $5 million (before taxes). You'll get 30 payments that average $5 million. Early amounts will be less than later payouts.
Powerball Cash Value
If you choose to take your winnings as a lump sum, you'll get considerably less than the stated jackpot amount. For example, according to CNBC, a Powerball jackpot with a value of $394 million in January 2020, had a pretax cash value of $274.6 million, or roughly 69.7 percent of the total.
The reason the cash option for Powerball is smaller lies in how Powerball funds its prizes. When a jackpot winner picks the annuity option, Powerball invests a certain amount of money in interest-paying U.S. government securities. Over the 29-year payment period, that investment generates enough money to pay the entire jackpot. However, if a winner chooses the lump sum, Powerball doesn't make an investment – it just gives the winner the money it would have invested.
Also, based on the IRS federal tax withholding rules, you would also miss out on a further 24 percent, reducing your winnings to $208.7 million. And if your state taxes lottery winnings, the prevailing rate would also deduct additional taxes from the remainder.
Present Value of Powerball Jackpot
The cash value of a Powerball jackpot is the "present value" of the annuity – it's the amount you would have to invest today to produce cash flows equal to the annuity payments. The exact amount of the cash value, then, depends on the interest rates paid on government securities. The higher the rate, the lower the cash value will be.
The further an annuity payment is in the future, the lower its present value, because invested money has more time to grow through compound interest. Because Powerball puts the largest payments at the end of the annuity (to keep up with inflation), that also reduces the present value, and thus shrinks the lump-sum payment.
Powerball Annuity vs. Powerball Cash Value
Which option is the "smarter" one from a purely financial standpoint really boils down to whether winners believe they can earn a higher return on money than Powerball would when it invests in government securities?
For example, at the time of the $394 million jackpot, according to experts’ advice offered via CNBC, if you were in a position to earn at least three percent after taxes, you were better off taking the lump sum, instead of an annuity. Therefore, if you think you can earn a higher return, take the lump sum and invest it. But if you don't, take the annuity.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.