Interest rates

Why high interest rates are partly responsible for the $2.04 billion Powerball jackpot

The Powerball Jackpot jumped to $2.04 billion after months of unsuccessful number combinations. On Tuesday morning, officials announced the winning numbers after a Monday night delay: 10-33-41-47-56 with a #10 Powerball. The winning ticket was sold at a Los Angeles County service center.

Part of the reason the prize money has reached record highs: Federal Reserve Chairman Jerome Powell. CNN Business reported that the Fed helped increase total winnings because of its interest rate hikes.

“The higher the interest rates, the higher the advertised grand prize. You may not realize that an economic reality like interest rates impacts even the Powerball jackpot, but it does!” an FAQ on the game’s website.

These rate hikes affect how much you would earn if you opted for the annuity payment option – that $2.04 billion – which is paid out over 30 years. and generate interest investments in US treasury bills. As GoBankingRates pointed out, US Treasuries currently yield greater 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 your money back, you also have the option of taking a smaller lump sum. nearly $1 billion.

The Fed’s recent interest rate hikes of course aren’t the only reason the lottery prize has ballooned to over $2 billion. As Marketplace reported in 2018, lottery jackpots in general have gotten bigger and bigger over the years. This is because Powerball and Mega Millions (an almost national game different from Powerball) have changed their prize structures so that it’s harder to win.

And when you can’t win, the prize will keep going up, which is why we’ve seen record-breaking Powerball prizes. The pot reached nearly $1.6 billion in 2016 and nearly $760 million in 2017.

“It’s important to mention that Powerball and Mega Millions were designed with smaller prizes, including $1,000,000 for matching all five numbers but missing the Powerball number,” said John Spry, professor of finance at the University from St. Thomas Opus College of Business. .

Spry noted that approximately 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 can use to help fund public works and services, like education), and are also used to help run the game.

As it took months for the winning numbers to be announced, he said Powerball ticket sales trickle down to each subsequent jackpot.

The chance to win the Powerball? 1 in 292 million.

Most lotto winners end up taking the lump sum. The last time a winner decided to opt for annuity payments was in 2014, according to the Multi-State Lottery Association.

The lump sum is the option that most experts have advised in the past. “If you’re able to invest it wisely, you’d probably be better off just taking the cash option, because you could take the excess and invest it in the stock market or other assets and get a higher return than what you get,” Nicole Kaeding, former director of federal projects at the Tax Foundation, told Marketplace in 2018.

Kaeding added that the annuity option is risky because you don’t know what the tax rate will be in the future. Take the lump sum and you will pay taxes on it based on the prevailing tax rate.

Even in this high interest rate environment, Spry explained that the investment options available to lottery administrators are “about the same as your options for buying bonds.”

So if you’ve taken the lump sum, there are US Treasuries available to you if you’re interested in lower-risk investment options, he added.

Ultimately, Spry said the most crucial part of your decision-making should be preparing to handle that amount of money if you win.

As with professional athletes and previous lottery winners, the problem you face is, “How do you handle a lot of money when you’re not used to having it?” Spry said. “It was very difficult.”

He noted that you need to think about estate planning, maybe even life coaching, and also aim to remain anonymous if you can.

Some states allow you to do so, while others allow you to set up a trust to claim the money anonymously.

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