How Did Interest Rates Impact Tonight’s $1.9 Billion Powerball Jackpot?
The Powerball lottery jackpot broke records Monday morning, Nov. 7, 2022, with a $1.9 billion jackpot. The payout has hit record highs because the Federal Reserve increased interest rates 75 basis points for the fourth time on November 5.
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The $1.9 billion number comes from the value that money will have if invested in government bonds for 30 years at current interest rates. U.S. Treasury bonds now yield more than 4% — nearly double the rate at the beginning of this year. If interest rates were still low, today’s jackpot would only be worth about $130 million as an annuity.
But you’ll only receive that much money if you win if you’re willing to wait. Powerball’s $1.9 billion prize is distributed in 30 equal payments of about $63 million for the next 29 years, CNN Business reported. The rest is held in annuities.
“The advertised jackpot is kind of a deception,” Victor Matheson, economics professor at College of the Holy Cross, told The Wall Street Journal. That’s because if the winner decides to take the prize as a lump sum immediately, they would only receive about $783 million — or half of the advertised winnings.
Typically, winners choose the lump sum payout and then — presumably — speak with financial advisors to invest in a way where they can get an even bigger return. In fact, according to news sources, no winner has chosen the annuity option since 2014. In recent years, the annuity price was only 50% to 60% higher than the lump sum cash value.
The large annuity means the winner will be faced with a tough decision: Take the upfront payout or accept just $929.1 million per year for 30 years? The current annuity prize is calculated assuming a return of about 5.75% per year, according to CNN Business.
Meanwhile, the stock market has generated an average return of 10% for the past 50 years. Between 2012 and 2021, the S&P 500 yielded a 14.8% average annual return.
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With this in mind, it’s possible the next Powerball winner will continue the trend of accepting the cash prize. Plus, most people love instant gratification, and taking home a hefty $929.1 million check is about as gratifying as it can get.
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