Part of the complete guide: Lottery odds: the complete guide
Where jackpot money comes from
Every ticket sold contributes to prizes, retailer commissions, state beneficiaries and administration. A portion is set aside for the jackpot. When a draw has no jackpot winner, the pool rolls over, and the contribution from the next draw's sales is added, so the advertised jackpot rises. The multi-state games set a starting jackpot, such as $20 million for Powerball and $50 million for Mega Millions, and increase it by a formula linked to sales.
Annuity value and cash value
The headline figure is the sum of 30 annual payments, each 5% larger than the last. To actually pay winners, the lottery must hold enough money today to fund that stream. That amount, the cost of buying securities that produce the payments, is the cash value. If interest rates are high, less money invested today is needed to produce the same future payments, so the cash value is a smaller percentage of the advertised jackpot. When rates were very low in the 2010s, the cash option was around 60% of the headline; with higher rates in recent years it has been closer to 45% to 50%.
| Interest rates | Cash value as a share of advertised jackpot | Why |
|---|---|---|
| Low | Higher, for example about 60% | More money is needed today to fund the same payments |
| High | Lower, for example about 45% to 50% | Less money is needed today because it earns more |
Why jackpots jump
- 1A jackpot is not won, so it rolls over and the advertised amount rises.
- 2Media coverage grows as the number rises, and more people buy tickets.
- 3More tickets means more money added to the jackpot, so the next increase is bigger.
- 4Eventually a ticket matches, or the game's odds make a win likely enough that it ends.
The odds are set long enough that rollovers are common, which is deliberate: bigger jackpots drive sales.
The advertised number is not what you win
Use the lump sum vs annuity calculator to compare, and read the complete guide to lottery taxes.
- Choose the cash option and you receive about half of the headline.
- Federal tax of 24% is withheld, and the real rate on a big win reaches 37%, plus state tax.
- If several tickets match, the jackpot is split.
Do bigger jackpots mean better value?
Not for your odds, which never change. A bigger jackpot raises the potential prize but also the number of tickets, and so the chance of sharing. After the cash option, tax and likely sharing, the expected value of a ticket is almost always below its price, even at extreme jackpots. See the lottery expected value calculator.
Example: turning a headline into a cheque
A $400 million advertised jackpot is paid as 30 payments. The first is about $6 million and the last about $24.8 million, each 5% bigger than the one before. If the cash option is 47%, the lump sum is $188 million. Federal withholding takes 24% ($45 million), and a winner in a state with no income tax might owe about $24 million more at filing (the top 37% rate less the 24% withheld), leaving roughly $119 million after tax. The headline of $400 million becomes about $119 million in the bank, which is why you should always ask "what is it worth after tax" before you let a big number excite you.
Questions people ask about jackpots
- Is the jackpot guaranteed? The lottery guarantees the advertised annuity for the draw, not that your ticket matches.
- Who pays it? The prize is funded from ticket sales and, for the annuity, from investments the lottery buys.
- Can the jackpot shrink? An advertised estimate can change before a draw if sales are lower than forecast.
Ready?
A weekly draw you can check yourself.
$5 tickets, a public random value, and every result published with the data to recompute it.
Frequently asked questions
How is the lottery jackpot determined?
By the starting amount plus contributions from ticket sales in each draw without a winner. The headline is the annuity value.
Why is the cash option so much lower?
It is the present value of 30 future payments, which is the money the lottery needs now to fund them.
Why do jackpots grow faster when they are big?
Bigger jackpots attract more ticket sales, which add more to the pool.
Do interest rates change the jackpot?
They change the cash value relative to the advertised figure, and can lead lotteries to advertise larger annuity jackpots.
Why did the cash value drop as a share of the jackpot?
Because interest rates rose, so the lottery needs less cash today to fund the annuity.
Is the jackpot taxed before it is advertised?
No. The advertised figure is before tax.
Who decides the starting jackpot?
The game's rules, set by the lottery group that runs it.