I purchased $20 worth of Big Game tickets last week. I didn’t win, but I have another chance this week Baby!
Anyway, they ask you whether you want to paid in a one-time lump sum (cash) or in periodic installments (annuity). What the purpose of doing this? To me, it would make more sense to ask a person AFTER he or she wins. This would save some time for the clerks. And I can’t really any benefits of asking before.
I can’t imagine why this would be asked when you buy the ticket unless the state is trying some form of informal survey to get a sense of what people would want. Unless the ticket is actually marked when bought to be an annuity or single payout (which I’ve never seen) I can’t see how what you tell the clerk makes any difference.
Who knows…maybe the clerk was just curious and performing his/her own poll.
Big Game tickets are marked either “Cash Option” or “Annuity Option”. I’m not sure why though, unless it’s to help the lottery people with their accounting in advance.
I’ve been told (sorry, no cite) that if you select Annuity you can ask for a lump sum when you pick up your winnings but if you choose Cash you can’t convert it to an Annuity later.
This must be something only some of the Big Game states do, because I know here in IL they don’t ask that upon purchase. And I’ve been buying tickets since this particular jackpot started.
If that’s the case, then there’s no point to even asking. Knowing this, why would anyone choose the cash option? Do you get more cash if you choose “cash” at the outset? It still doesn’t make sense to me.
I can’t remember all the details, but I used to sell quite a few lottery tickets when I was a clerk in MA - we were told that the cash/annuity question was an IRS thing, but they stopped doing it at some point. And I’d think everyone would pick cash - you can certainly invest the lump sum with a much better rate of return then you’d get choosing the annuity.
In Ohio they ask and it’s marked on the ticket. This is from their website:
And this is from the Big Game website:
Note that for the Big Game it says you must select between cash and annuity. It also doesn’t mention the ability to switch an annuity to cash. I would guess that in IL if they don’t ask they’re just lazy (maybe everybody says “cash”).
But I did some more digging (found the FAQ) and it seems that it is Federal Law that they allow you to convert from an annuity to cash:
That is actually a pretty good question. An even better question is why anyone would ever take the annuity over cash. You get your payout cut in half but how hard is it to double your money in 20 years on your own? Only a raving idiot would choose the annuity and hopefully any lawyer or financial planner that they hire would tak them out of it before the 60 days is up.
They say that the lottery is a hidden tax on people that are bad at math. I think that they are simply trying to let them have one more chance to prove it.
WAG: it gets gamblers to visualise winning. The illusion of making such a choice when you haven’t yet won makes the dream more vivid (and therefore sells more tickets).
Many gamblers are (just) smart enough to realise they are deficient in self control. Like Ulysses, they want to be tied to the mast because they know they are weak.
I think the major reason that the lotteries have an annuity payout is so they can advertise a bigger jackpot. The current Big Game jackpot is $325 million, paid as an annuity, but only about $175 cash value. It’s easier to advertise a bigger number, particularly when the jackpots are smaller.
For what it’s worth, here’s the Maryland Lottery Board’s response :
Q:Why does the Big Game ticket ask us to make this
choice when we buy a chance? Wouldn’t it be easier to
ask just the winner(s)? What difference does it make
to you if you know Cash versus annuity a couple of
days early?
A: They shouldn’t ask. The IRS has ruled that you need not decide until after you’ve won.
So it looks like lucidity had it right – apparently it was all originally based on IRS regulations, which have since changed. No marketing or preference information gathering that they’re 'fessing up to.
For what it’s worth, here’s the Maryland Lottery Board’s response :
Q:Why does the Big Game ticket ask us to make this
choice when we buy a chance? Wouldn’t it be easier to
ask just the winner(s)? What difference does it make
to you if you know Cash versus annuity a couple of
days early?
A: They shouldn’t ask. The IRS has ruled that you need not decide until after you’ve won.
So it looks like lucidity had it right – apparently it was all originally based on IRS regulations, which have since changed. No marketing or preference information gathering that they’re 'fessing up to.
This should probably be brought up in another forum (by someone more knowledgable in accounting than I am!), since it is certainly debatable. I couldn’t find any lotto website where they disclosed the interest rate that the annuity earned, but many sites that give estimates of what the lump sum and annuity would be for a given jackpot. A lot depends on what you plan to do with the money. Assume a total tax rate of 40% and you decide to spend 100,000 a year (living expenses, etc.), then you would need to earn close to 8.5% interest for the lump sum to be the better deal. Doable, but not guaranteed, and some people may prefer the sure thing. True, if you spend none of the money, the lump sum outstrips the annuity at even lower rates.
Of course, if you don’t plan on spending any of the money, then you probably wouldn’t mind giving all of it to me, right?
I figured these rough numbers based on a 6 million dollar jackpot. For much larger jackpots, the lump sum becomes a much better choice.
I’d rather have the annuity; 20-some-years of guaranteed income, and I can (try to) put my annual payments into high-yield investments at the same time. I can’t see the appeal of the lump-sum payments, myself.
There are a lot of secondary issues in making the choice of annuity vs. lump. E.g., you die a couple of years after winning, your heirs get your winnings. If you took a lump, they can pay estate taxes out of the lump they get. If you took annuity, they still have to pay estate taxes based on the whole amount. So they have to raise big bucks, which might require selling the annuity to those sleazy companies.
Generally lump has fewer headaches than annuity but not always.
The much, much bigger question is why anyone would play the lottery. It is quite simply a tax on those that can’t to math. Really.
Ever been to a football stadium? Well, if not, picture any very large seating capacity structure. Doesn’t matter. Let’s say the stadium holds 100,000 seats (most hold much fewer). Now picture, on each and EVERY seat, 14 music CDs. Now, for $1, you get to go in and pick just two CDs. If one of them matches the name written down by the guy running this, you win! If not, “next!” This is for a 1 in 14,000,000 chance of winning! Big Game is far worse! Big Game is 1 in 76,000,000. (Picture 76 CDs on each and every seat… and that is in a 100,000 seat stadium! Most stadiums would be 50,000, meaning you need 152 CDs on EVERY seat).
So how you take a trip to NYC. You open a phone book listing EVERY SINGLE PERSON IN THE GREATER NYC area. And then some. Find a name. Pick a second name. Stop the next person on the street and ask if they are either of those two names. No? Next! Again, that is for 1 in 14,000,000. 1 in 76,000,000 would be more like NYC, Boston, LA, Chicago and more… COMBINED. Probably like the entire West Coast of the US.
If you came across either of these games at a fair, you wouldn’t play. You’d laugh at those that did.
Your chances are, to 7 (!) decimal places, 0.
As for cash or annuity, well, I guess the question is whether you think you can invest smarter than the people running the lottery.
Payout for Big Game right now is $325,000,000 jackpot or $170,950,00 cash. Assume 40% tax. Jackpot would be $195 million. Cash would be $102 million. Doing the math, it is obvious the lottery officials expect to earn 8.25% on the money. If you can beat that, go with cash. If you can’t, annuity is the way to go.
More directly to the OP, which is: why do they care? More than likely it has to do with figuring the jackpot total. The upfront cost of a cash payout is obviously much higer than an annuity payout. Figure in the probabilities based on how many picked which, and you can get a good idea how much cash they are going to need for the next payout. As others pointed out, people can switch, but there again I’m sure those odds are figured into all this. It really doesn’t matter, though.
Heck, I’ll pay that 2 buck a week stupid tax if it helps support my “tell your boss how much of a prick he really is” dream. I’m paying for the dream. If the payout is 10 million, I spend 2 bucks a week, if it’s 300 million, I spend 2 bucks a week. It helps me keep my sanity.
What has six balls and screws you twice a week?
Why do you think everyone who plays the lottery doesn’t understand that the odds are infitesimal? I am sure most do.
I only risk a few bucks, with the possibility of getting 34,000,000 times that, assuming I bet only 3 dollars.
Still, somebody wins. I would play that game. Why not? I’m not really risking much of anything. I’ve played games at fairs where I’ve gotten the chance at much much much less.
Even if I don’t win, I have some fun for a few days dreaming, like NurseCarmen said.
Speaking from Georgia, a BIG GAME state (and you’d better believe I bought a ticket!):
If you choose Cash Option (it IS printed at the top of your ticket), you can count on about half the advertised jackpot in a lump sum. You CANNOT switch your choice to Annuity. If you choose Annuity, you have six months to change your election to Cash. Here’s the kicker, folks: You can’t bequeath the annuity to an heir. If you keel over on the podium (as if you’d allow them to release your name!), your family is SOL. Take the money and run. After taxes, figure on 1/3 of the jackpot amount in cold, hard cash.
Get a lawyer and an accountant and start enjoying the good life. Math geeks: It’s entertainment, not a statistical problem. SOMEONE is going to win that wad of dough. Drinks are on me at the next ATL dopefest if my Quickpicks are the lucky ones.
[Nitpick]
Maybe I’m one of those that can’t do math, but I think you mean 140, 760, and 1520 CDs on each seat. 
[/Nitpick]