Nobody has won the Powerball lottery in a while and the jackpot has now risen to $1.6 billion, the biggest jackpot in history. In 2013, I wrote about how to calculate whether the odds were in your favor to play the lottery. It almost never is, but because money from past weeks accumulates, it is possible at least. It is made especially challenging if you take into account the taxes you will pay on the winnings, which will be taxed at the maximum rate of 37% federal and 5.75% for Georgia state income tax. When I ran through the calculations last, I figured the Powerball jackpot break even jackpot would need to be $1.65 billion. That was then. The lottery really inflates the value of the jackpot by adding together all of the payments over 30 years. Using time value of money calculations, the “present value” is much less. And they skew it even further by using a graduated payment where you get paid more as time goes, putting more of your payments further into the future and making the present value even less. So for the last big jackpot in January 2016, the cash value of the jackpot was only 62% of the total jackpot. But tonight’s jackpot of $1.6 billion has a cash value of only $782 million or about 49% of the advertised jackpot. I don’t know when they went to the graduated payments, but a big difference this time around is that interest rates are higher. The lottery sets aside some amount of each ticket sale to fund the big prize. The money they collect plus whatever they got in past jackpots that went unwon is the cash value of the jackpot. Then they calculate a total jackpot by doing some time value of money calculations and figuring that money that sits in their savings account will earn a certain amount of interest until it needs to be paid to the winner. Just like a savings account with a higher interest rate will leave you with more money in the future, the higher interest rates means they can pay out a lot more in the future than they can now even if they start with the same amount of money. So tonight’s record-breaking jackpot of $1.6 billion beats out the January 2016 jackpot of $1.59 billion dollars, but back then the cash value of the jackpot was $983 million, way more than the $782 million at stake tonight.
When I run through my calculations to determine a break even jackpot, I always use the cash value, so that I can compare today’s $2 ticket price to today’s cash prize. Back in 2016, the break even advertised jackpot was just over $1.6 billion. But with higher interest rates and the graduated payout scheme, the break even jackpot today is a staggering $2.2 billion, even though the odds of winning have not changed. So I am sitting this one out.
No winner last night! So the jackpot will grow to $1.9 billion. The cash value will be up to a quite respectable $929 million, still not quite as big as in 2016. They will draw again tomorrow since they now have 3 drawings per week instead of 2.
They finally had a winner. The final jackpot was $2.04 billion or $997.6 million cash value, so it does beat the 2016 jackpot, but still missed being a break even jackpot.