A huge lottery jackpot is a dream come true for many. But before you start planning your luxury home, trip around the world or close all debts, it’s important to understand how the payout works. And you might be surprised to find out that choosing certain numbers gives you a slight advantage.
If you win a large lottery jackpot, you’ll have the option to take a lump sum payment or an annuity (a series of yearly payments). The majority of winners choose the lump sum option. But why? Generally, it comes down to the fact that they think they can do better investing the money on their own than the New York Lottery can.
The lottery draws lots of people, and a prize this big makes headlines, which drives ticket sales. The lottery also gets a windfall of free publicity on news sites and on television, which helps boost ticket sales even more. This cycle continues until someone wins. Then the jackpot resets at a smaller amount.
As interest rates go up, the size of a jackpot goes up, too, though the amount of cash in the prize pool doesn’t change. The bigger the jackpot, the more people buy tickets, which increases the chance that a person will select the winning numbers.
In addition to changing interest rates, there’s a bit of psychology at work, says Tim Chartier, a mathematics professor at Davidson College and visiting distinguished professor at the National Museum of Mathematics in New York City. The public sees a huge sum of money, and they assume that it will grow over time. That’s why the jackpot is usually displayed as an annuity, which shows how much you would receive each year for three decades.
The biggest hurdle, however, is getting the money out of the prize pool and into your pocket. The New York Lottery, for example, asks seven different bond brokers to quote a package of bonds that will pay 25 future yearly payments. It then buys the bonds at the best price, and an investment bank holds them for the winner. The winners typically get the first payment a few weeks after the winning numbers are announced, then annual payments for the rest of their lives.
Whether you’re planning to play the lottery or already have, it’s important to consult with a financial professional who can help you evaluate your options. Use NerdWallet’s free tool to match you with an advisor who meets your needs. If you prefer to speak with a live expert, call us for a no-cost, no-obligation consultation.