Suppose I offer to give my daughter $25. She's delighted, until she learns the details. Instead of giving her the money now, I pledge to pay her in installments: $1 today, then $1 a year for 24 years. "There you go," I say. "You've now hit the jackpot for $25."
"But that's not really $25," she'd probably say. And she'd be right.
When you give someone money over time, in installments, how much is the gift worth? Is it the sum of all the annual payments? No. It's a lot less than that.
In my example, I'd probably have to invest only about $14 today to make sure that my daughter received all of her annual $1 payments. So the real value of the gift would probably be only about $14, not $25.
Keep this point in mind when it comes to state lottery jackpots. The numbers the lotteries advertise aren't always accurate.
Walking through a Metro station outside Washington, D.C., recently, I saw a poster for Powerball, the multi-state lottery game. In big, bold letters, the poster proclaimed the value of the game's then-current jackpot: $48 million. But in fine print came the details: "Saturday's estimated annuitized value."
In other words, had you hit the jackpot in that Saturday's drawing, you wouldn't have received, in a lump sum, the $48 million figure that the lottery had stamped on the subway poster. Instead, you would have been paid in annual installments (in what the experts call an "annuity"). It's the annual installments -- one up front, then one a year for the next 24 years -- that would have totaled $48 million.
What if you had demanded to be paid in a lump sum? You probably would have received $24 million or so. Why? Because that's approximately what the lottery would have had to invest in order to generate all those annual payments, the ones totaling $48 million.
So why don't all lotteries advertise the real value of jackpots? Mainly it's because they're in the revenue business. They know that the bigger the jackpot figure, the more you'll be tempted to play. And the more money that's wagered, the more money the games will generate in revenue.
The news media gets caught up in the numbers game, too. A recent story in The Washington Post focused on a suburban Chicago family that came forward to claim half of the jackpot in another multi-state lottery game, The Big Game. (The other half of the jackpot had been claimed by a man from suburban Detroit.)
It was the biggest lottery jackpot in U.S. history, the Post declared, a prize worth $363 million. But was it really worth that much? No. Both winners asked to be paid in a lump sum. Each got about $90 million before taxes. In other words, the true value of the jackpot was really about $180 million before tax, not the $363 million pre-tax figure that the lottery -- and the news media -- had trumpeted.
If you're only an occasional player, one who won't buy a ticket until a lottery jackpot gets really big, keep in mind that the jackpot isn't as big as advertised.
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