After months of anticipation, a winner finally came forward to claim the record-breaking $2.04 billion Powerball jackpot won on a single ticket sold in California. Though the jackpot was advertised as a multi-billion dollar prize, the lucky winner walked away with just $997.6 million – why?
It’s all because of the ways in which a jackpot winner can claim their prize.
Anyone lucky enough to win the Powerball jackpot, regardless of its size, has two options when it comes to claiming their winnings.
The first, and most common, is the cash option. That value is typically listed secondary to the advertised, estimated jackpot. For example, the record-setting Powerball jackpot was advertised as being $2.04 billion while its cash value was $997.6 million.
According to Powerball, that cash value has to do with the second prize-claiming option: the annuity option, which gives the winner 30 graduated payments, which increase by 5% annually, over 29 years.
The cash value listed for the jackpot is, generally, “the amount of money required to be in the jackpot prize pool, on the day of the drawing, to fund the estimated jackpot annuity prize,” Powerball officials explain. So, during the last major Powerball jackpot run, officials determined $997.6 million was necessary to pay the winner $2.04 billion over 29 years if they selected the annuity option.
“There is no $2.04 billion sitting around, that money does not exist. What exists is that lump sum,” Carolyn Becker, deputy director of public affairs and communications for the California Lottery, told Nexstar last month. That lump sum is fueled by ticket sales, which, along with the annuity factor, is crucial in determining the jackpot’s estimated size.
According to Powerball, the annuity factor is calculated based on the interest rates for securities – U.S. Treasury bonds – that are purchased to fund the annuity prize payments. Higher interest rates, like those we’ve seen in recent months, allow the advertised jackpot prize to climb.
The difference between the cash and annuity options isn’t limited to Powerball – Mega Millions functions the same way. The winner of the $1.35 billion Mega Millions jackpot hit by a single ticket sold in Maine last month also opted for the cash option when they came forward, giving them a slightly smaller prize of $723 million before taxes.
Though the annuity option will, eventually, end up being a bigger payout than the cash option, most jackpot winners select the lump sum payments. Some financial advisers say that might be a mistake.
While the winner of the $2.04 billion jackpot isn’t walking away a billionaire, he has received the largest cash payout in Powerball history, according to game records.
Powerball is played in 45 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Drawings are held every Monday, Wednesday, and Saturday, and your odds of landing the jackpot are 1 in 292.2 million.