The lump-sum option and the annuity option have the same Net Present Value at an interest rate of about 6%.
If you are confident about your ability to get a better return than 6%, then take the lump sum.
If not, take the annuity.
When I was in college, you could easily get 6% from an ordinary savings account. I would always have taken the lump sum. Since the 2008 financial crisis, the government has been artificially suppressing interest rates, so the annuity has probably been safer. Now that interest rates are rising again, you have to evaluate how you believe the economy will go in the future.
My ritual is to toss the ticket in a drawer and virtually forget about it. Two tickets, in a row I’ve not checked them yet, to paradise and hate to lose. Cant look.
Not buying tonight
The interest rate is nowhere near that fixed. It was as low as 2% just a few years ago.
But other than that you certainly have the right idea. Ultimately it’s the interest rate they can get for a 30-year annuity bought in the month the winner turns in their ticket. And that annuity company is selling something that’s a sure thing for them, so less implied return for the winner than they expect to make themselves.
As @Velocity explained (and thank you for that cogent explanation), the annuity can be viewed as an insurance policy against blowing it all right away, or losing more than one year’s worth in any given year. It’s not perfect insurance, a truly great conman could get an unsophisticated winner to hand over the rights to all the future payments too.
Which in addition to @Velocity’s decent rubric brings up another factor: how financially sophisticated is the winner? I’m sure not competent to manage investing a billion-plus dollars well. But the experience I do have with the chunk of money I do have suggests I’d probably make better decisions than e.g. the convenience store clerk who sold me the ticket if they were the winner instead of me.
I’d also suggest that how big the win is matters. With the current $1.5B payout, the 30 year annuity is very very roughly $50M / year. It’s actually darn hard for any of us to learn to spend quite that much money from a standing start. I’m sure I could grow into it, and even more so if I was younger. The marginal utility of the whole enchilada above 50M/yr is tough to use though. Might be better to have them hold it for safekeeping.
Conversely, if the jackpot was the $40M minimum, the annuity would be like 1.3M / yr.
I know a bunch of people who spend that much now, and know of people around here that spend well north of that. I could get through several mil real easy stocking up on long-lived toys. Of course those could be financed too to reduce the upfront hit if necessary.
I would play the lottery regularly if there weren’t the hassle involved of getting mentally invested in it. I wish there were some subscription system that would automatically buy me 1 Powerball and 1 Mega Millions every single time it was run, without my having to think about it, and deduct the cost out of my bank account or something, and also automatically check it by the winning numbers for me.
Of course, this would just mean $80 or so being deducted out of my bank every year without my even noticing, but that would be the most hassle-free way to do it.
Powerball is $2 per chance and runs 3x / week = 156 times per year. So that’s $312 per annum.
MegaMillions is $2 per chance and runs 1x / week = 104 times per year. So that’s $208 per annum.
Taken together you’re looking at $520/yr. for one chance per draw. Not the cheap dream-fodder it once was.
Years ago when I lived in Las Vegas there were similar subscription programs available for Keno. I’ve never seen one for Powerball and I’ve bought tickets in a lot of different states while traveling. There might be a state that offers that option.
MegaMillions is $2 per chance and runs 1 2x / week = 104 times per year.
My own habit is to not bother until the jackpot breaks about 100m. I’m not far from ticket vendors most days, so it isn’t a big production or decision to buy or not to buy. I’m also not spending my lunch money. Or worse yet, the rent money.
The governments that are behind Powerball & MegaMillions are in a ticklish moral and public policy spot. Voluntary taxation is good; certainly better than involuntary taxation. But lotteries are highly, highly regressive forms of taxation practically speaking. And are very addiction-ogenic. Both of which are bad things for governments to be seen encouraging.
Making it any easier to buy tickets on subscription is probably a moral bridge too far.
If you live in a state that allows the Jackpocket app to operate you can order ticket’s automatically. I think you can’t set up deductions to be automatic.
As of 2020, nine states allow lottery subscriptions. You can opt for them to renew weekly until you choose to cancel.
I tried to set up a Powerball subscritpion in my state (Michigan) but my credit card was denied. After investigating, I learned that my specific credit card cannot be used for “gambling”.
Go us!