This Wednesday’s Powerball drawing is for the largest jackpot in US history. The Powerball website lists the jackpot at $1.5 BILLION dollars – but will you really receive $1.5 billion if you win?
There are a few things you should know when expecting to become an overnight billionaire through the lottery.
Second, the jackpot isn’t for $1.5 billion, it’s actually for $930 million – the jackpot’s “cash value.” You see, the big number the lottery people tell you is the jackpot is actually an estimated return based off an annuity, or an investment (or series of investments) that pay you dividends over a number of years. In the case of Powerball the annuity is 30 years. That means the lottery people will take the $930 you won, give you some of it, and then invest the rest for 30 years.
Here’s the kicker – if those investments don’t do well, you could be paid less than promised. What if the annuity does better than planned? You get no more than promised.
So with the annuity you’re giving your money to a non-profit organization overseen by members of the government, and hoping that they invest it wisely for you – instead of taking the money yourself and investing it privately. Because you know how the government is known for being financially so wise.
Third, you’re paying taxes every time you get a check, whether you choose the annuity or not. The federal government is going to take $119,996.25 of your first $413,200, then they’re going to take 39.6% of everything you make after that. Then your state is going to tax you if they have income or lottery tax, and then your local county, city, or town may tax you if they have a similar tax.
If you take the cash option when you win, you’re only taxed for that first year.
If you take the annuity, you get taxed EVERY year for 30 years. If your state or local government raises their tax rates, you’ll pay MORE taxes on those years. So with the annuity, you’re already gambling the government will invest your money wisely, and then you’re gambling the government won’t raise taxes – which, you know, they are historically famous for doing.
Lastly, inflation is going to kill the value of your prize if you take the annuity. Inflation is when the cost of goods goes up over time. The cumulative rate of inflation for the last 30 years was about 120%, meaning you’re now paying over twice as much as you were paying for things 30 years ago. Check out this inflation calculator to see what things cost over the last 100 years, and what they cost now.
In summary – if you take the cash value of your jackpot immediately, you’d give up almost half of it in taxes, but still could be worth over half a billion dollars right away! Here in Massachusetts, you’ll get a one-time check for $514,290,000.
If you take the annuity you’re gambling the government gambles well with your money. Even if they gamble well and pay you $50 million every year for 30 years, you’re going to lose 39.6% of that every year, at a minimum, but that will probably increase. Likewise, your dollars become worth less every year, so it effectively becomes a smaller payment.
Your first annuity payment, if you lived in Massachusetts, would come to about $27,650,000, but the 30th payment would feel more like $10,000,000.
The moral to the story here is yeah, the annuity is a piss-poor deal for people who are too lazy to win half a billion dollars and learn how to invest it wisely. But then again, hey, you’re still a freaking multi-millionaire until 2046! Just go buy a ticket!!