Why high interest rates are partly responsible for the $2.04 billion Powerball jackpot
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Why high interest rates are partly responsible for the $2.04 billion Powerball jackpot
The jackpot for the Powerball surged to a whopping $2.04 billion after months of unsuccessful number combinations. On Tuesday morning, officials announced the winning numbers after a delay on Monday night: 10-33-41-47-56 with a #10 Powerball. The winning ticket was sold at a service center in Los Angeles County.
Part of the reason why the prize amount has been reaching such record highs: Federal Reserve Chair Jerome Powell. CNN Business reported that the Fed has helped boost the total prize winnings because of its interest rate hikes.
“The higher the interest rates, the higher the advertised Grand Prize. You might not realize that an economic reality like interest rates impact even the Powerball jackpot, but they do!,” says an FAQ on the website for the game.
These rate hikes play into the amount you’d earn if you take the annuitized payment option — that $2.04 billion — which is paid out over a span of 30 years and accrues interest from investments in U.S. Treasury bonds. As GoBankingRates pointed out, U.S. Treasury bonds currently yield more than 4%, which is almost double the rate it was earlier this year.
But if you win the lotto and don’t want to wait 30 years to get all of your money, you also have the option of taking a smaller lump sum of nearly $1 billion.
The Fed’s recent interest rate hikes of course aren’t the only reason the lottery prize swelled to more than $2 billion. As Marketplace reported back in 2018, lottery jackpots in general have been getting bigger and bigger over the years. That’s because both the Powerball and Mega Millions (a different, nearly-nationwide game than the Powerball) tweaked their prize structures so that it’s harder to win.
And when you can’t win, the prize will keep increasing, which is why we’ve seen record-setting Powerball prizes. The pot reached nearly $1.6 billion back in 2016 and almost $760 million in 2017.
“It is important to mention that Powerball and Mega Millions have been designed with smaller prizes, including $1,000,000 for getting the five numbers but missing the Powerball number,” said John Spry, a finance professor at the University of St. Thomas Opus College of Business.
Spry noted that roughly 34% of Powerball ticket sales are used to fund the jackpot, with 16% going to smaller prizes. He added that the remaining sales go to retailers and states (which they may use to help fund public works and services, like education), and are also used to help run the game.
Since it took months for the winning numbers to be announced, he said Powerball ticket sales had been rolling over into each subsequent jackpot.
The chance of winning the Powerball? 1 in 292 million.
Most lotto winners end up taking the lump sum. The last time a winner decided to opt for the annuity payments was back in 2014, according to the Multi-State Lottery Association.
The lump sum is the option most experts have advised in the past. “If you are able to invest it wisely, you likely would actually be better off to just take the cash option, because you could take the excess and invest it in the stock market or to other assets and earn a return that is greater than what you are receiving,” Nicole Kaeding, former director of federal projects at the Tax Foundation, told Marketplace in 2018.
Kaeding added that the annuitized option is risky because you don’t know what the tax rate will be in the future. Take the lump sum and you’ll pay taxes on it based on the current tax rate.
Even in this high interest-rate environment, Spry explained that the investment options available to the administrators of the lottery are “pretty much the same as your bond-buying options.”
So if you took the lump sum, there are U.S. Treasuries available to you if you’re interested in low-risk investment options, he added.
At the end of the day, Spry said the more crucial part of your decision-making should be preparing yourself to handle this amount of money if you win.
Like with professional athletes and previous lottery winners, the problem you run into is: “How do you manage a large amount of money when you’re not used to having it?” Spry said. “That has been very challenging.”
He noted that you need to think about estate planning, maybe even getting life coaching, and also aim to remain anonymous if you can.
Some states allow you to do so, while some others allow you to create a trust to claim the money anonymously.
Correction (Nov. 8, 2022): A previous headline for this story misstated the amount of the Powerball jackpot.
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