Posted July 31, 2023 at 1:51 p.m. ET
A display for the Mega Millions lottery is seen at the Save ‘N Time store in Harahan, La., Wednesday, July 26, 2023. The Mega Millions lottery jackpot hit $1 billion ahead of Friday’s draw. (AP Photo/Gérald Herbert)
DES MOINES, IOWA — Another day, another billion-dollar lottery jackpot.
At least that’s what seems to be happening ahead of Tuesday night’s Mega Millions draw, with the top prize estimated at $1.05 billion.
It’s a huge sum of money, but these giant jackpots have become much more common, with five prizes exceeding $1 billion since 2021 – and one jackpot reaching $2.04 billion in 2022.
The massive prices are partly due to chance, but it’s not all happenstance. Rising interest rates coupled with changing odds of winning are also important reasons why prizes are becoming so important.
HOW DO INTEREST RATES INCREASE JACKPOTS?
Almost all jackpot winners opt for a lump sum payout, which for Tuesday night’s draw would be estimated at $527.9 million. The lump sum is the money a winner actually won. The $1.05 billion prize highlighted is for a single winner who receives an annuity funded by this lump sum to be distributed annually over 30 years.
This is where the higher interest rate becomes a factor, because the higher the interest rate, the more the annuity can grow over three decades. The United States is in the midst of a remarkable series of interest rate hikes, with the Federal Reserve raising its key rate 11 times in 17 months, and this higher rate is helping present a lump sum of around $500 million. dollars as a jackpot of about two times. this size.
HOW DOES THE ANNUITY WORK?
A winner who chooses the annuity option would receive an initial payment then 29 annual payments that increase by 5% each year. Opting for an annuity has certain tax advantages, as a lesser portion of the earnings would be taxed at the top federal income tax rate of 24%. This could also be an option for winners who don’t trust themselves to handle that much money at once.
If lottery winners die before age 30, future payments will go to their beneficiaries.
WHY DO WINNERS SNUB THE ANNUITY OPTION?
Annuities bring in a lot of money, but not as much as a lump sum.
For example, a single Tuesday Night Mega Millions winner could choose an estimated lump sum of $527.9 million or an initial annuity payment of approximately $15.8 million. Of course, these annuity payments would continue for decades and gradually increase until the final check yielded about $65.1 million, according to lottery officials.
In either case, the winnings would be subject to federal taxes, and many states also tax lottery winnings.
Given all of this, almost all jackpot winners think they could make more money by investing themselves, or they just want the biggest upfront payout possible.
WHAT ABOUT THE CHANCES OF WINNING?
This is another factor that has created many huge prizes for those who match all six numbers.
In 2015, Powerball odds went from 1 in 175.2 million to 1 in 292.2 million. Mega Millions took a similar step in 2019 by extending the game’s odds from 1 in 258.9 million to 1 in 302.6 million.
For lottery officials, the hope was that by making it harder to win jackpots, prizes would be delayed for weeks and create truly massive sums of money which, in turn, would generate higher sales. .
The result is that all of the billion-dollar jackpots were won after the odds changes.
HOW LONG UNTIL A WINNER?
Luck remains an important factor, as the odds of a ticket being a winner never change. However, the more people who play Mega Millions, the more of the 302.6 million potential number combinations are covered.
In the latest Mega Millions drawing on Friday night, 20.1% of possible number combinations were purchased. Generally, as the jackpot increases, more people buy tickets and the more potential combinations are covered.
Tuesday evening’s drawing will be the 30th since the last jackpot winner. This comes close to the longest Mega Millions jackpot drought, which reached 37 draws from September 18, 2020 to January 22, 2021.
The longest-running jackpot was a Powerball prize that spanned 41 drawings and ended with a record prize of $2.04 billion on November 7, 2022.