Does One Jackpot Grow Faster?

Now that Powerball® and Mega Millions® are both being sold in Iowa, folks are really watching – and comparing – the games’ jackpots. And when both big prizes were getting up there earlier this month, we got a lot of questions from people who were wondering about the cash vs. annuity options.

Specifically, they were asking why the cash amount of the Powerball jackpot was lower than the cash amount of the Mega Millions jackpot when the annuity jackpots were about the same.

The quick answer is that the Powerball jackpot earns more interest over time. But here are the details:

All lotteries start with the cash jackpot amount – that’s the amount of money that lotteries have on hand from the sale of tickets in the game. The lottery will pay that cash amount to the winner who chooses to receive the jackpot as a lump-sum, cash payment. (Withholding taxes also are taken out as required by federal and state law.)

But if the jackpot winner chooses the annuity option, the lottery invests the entire cash amount before taxes are deducted. The cash that is invested earns interest over time, and the cash PLUS interest equal the annuity jackpot amount. 

There are a few reasons that the Powerball jackpot earns more interest:

1. More money is invested for a longer period of time. The Powerball annuity is paid out in graduated amounts (rising by 4 percent per year to keep up with inflation) over 29 years (30 payments). The Mega Millions annuity is paid out over 25 years (26 payments). In both cases, the first payment is immediate.
2. Powerball invests in a wider ranger of securities. The Mega Millions jackpot invests only in U.S. Treasury Securities Stripped (CUSIPs starting with 912). The Powerball jackpot invests in about 20 different securities. Please note that the winner is not invested in the securities. The winner has a contract with the states to pay the prizes, no matter what happens to the securities.

A winner who wants to take the cash jackpot should compare only the cash jackpot amounts. The annuity jackpot amounts will be important for those winners who plan to select a long-term, fully guaranteed income stream.