How Powerball and Mega Millions Jackpots Are Calculated
Have you ever wondered how exactly the Powerball and Mega Millions jackpots grow to their record-breaking levels? What are the cash option and annuity and how are they determined? And why does the amount of the jackpot often change just after the drawing? Let’s take a deep dive to answer these frequently asked questions and more.
There are multiple types of jackpots, not just one. Both Mega Millions and Powerball use a progressive jackpot, which also happens to be the most common type of jackpot and the easiest to understand, so that’s the type discussed below.
A progressive or rolling jackpot is one that increases every time there’s a drawing without a winner. This is called a rollover - when you hear that the jackpot has rolled over, it means the prize has grown because no one won it.
After a progressive jackpot is won, the amount resets to its starting value for the next draw. That used to be a guaranteed $40 million for both Mega Millions and Powerball.
However, when ticket sales were affected by the coronavirus pandemic, the groups that run the games had to lower the starting jackpots to $20 million. This was not meant to be a permanent measure, but so far we don’t know when or if the jackpots will return to a $40 million starting value.
After each draw without a winner, the jackpot rolls over and grows by a predetermined value. The increase for Mega Millions used to be $5 million per roll and for Powerball it was $10 million. The increase level was also changed due to lower sales during the pandemic. Mega Millions’ guaranteed rollover amount was cut to $2 million, while Powerball currently does not have a guaranteed increase, and the jackpot rises based solely on ticket sales.
However, you may have noticed that jackpots don’t just increase by the same set amount every time – for example, if the Mega Millions jackpot did increase by a fixed $2 million with each rollover, it would take a very long time for it to reach the amazingly high levels that the game is known for. Also, players would probably get pretty bored – not what any lottery wants!
To keep the excitement going, jackpot estimated values are also based on ticket sales for the previous drawing. Sales levels depend on a lot of factors; for example, players buy more tickets during the holiday season and New Year, but around February people cut their spending and ticket sales dip.
Another variable influencing sales is the jackpot level. When jackpots get to a certain point, the huge jackpot size makes headlines in the media, and more people who aren’t regular lottery players start buying tickets. And while they’re getting tickets for one game, they may pick up a few more for another game on the spur of the moment.
A third element affecting ticket purchases is the day of the week – for example, sales are generally better for a Saturday draw versus a Wednesday draw.
Broader economic factors such as stretched household budgets due to inflation and gas prices can also affect ticket sales, and in turn, jackpot growth.
How Does the Annuity Work?
The advertised jackpot – what you see in the headlines and retailer signs – refers to the estimated annuity amount. That huge value is what creates excitement around the top prize and drives ticket sales.
You probably know that if you win the jackpot, you can choose to have the prize paid as an annuity or cash value option. The annuity pays you the full advertised jackpot in 30 instalments over 29 years (one payment is made right away after processing your claim), less federal and state taxes.
However, these are not flat payments – the amount actually increases every year. In fact, Mega Millions and Powerball are among the only lotteries to offer an annuity prize that grows every year. Most local state games that offer an annuity simply offer fixed annual payments. Powerball initiated the graduated payment system and Mega Millions also adopted it a few years later.
The annuity amount reflects the money in the prize pool being invested over 29 years. The lotteries buy US government Treasury securities that earn interest over time. The Mega Millions and Powerball annuities increase in value by 5% every year, so each payment is 5% larger than the previous one. That protects players from inflation and other variables which would reduce the actual value of their prize if they simply received a flat amount every year.
The securities’ available interest rates determine how much the payouts increase over time. The lottery assesses interest rates from a range of banks and other lenders before the jackpot amount for the next draw is revealed to the public. Higher interest rates equal a higher advertised jackpot.
How Lotteries Determine the Jackpot: Step by Step
It may seem counterintuitive, but the first thing lotteries need to know to calculate the advertised jackpot (annuity) is the cash option amount. Let’s break the process down step by step.
First, a draw takes place and there’s no winner. The lottery now needs to calculate the advertised top prize for the next draw, and the only thing that they know for sure is the amount of cash that’s come in from ticket sales since the last time the jackpot was won.
Second, they’ll estimate the number of tickets that will be purchased before the next draw, considering variables like the size of the jackpot, seasonal trends, and the overall economic climate.
Third, they’ll add 32.5% of the projected ticket sales to the existing cash on hand. The 32.5% only includes sales from the main Mega Millions or Powerball games, not sales of the add-ons Megaplier, Power Play, and Double Play.
Also, the 32.5% only funds the jackpot, not the other prize levels. The lower prize tiers are paid for by each jurisdiction from the 67.5% of ticket proceeds that stay in the state where the ticket was sold.
For example, if you purchased a Powerball ticket in New York and won the $1 million Match 5 second prize, that prize is paid by the New York Lottery. However, if you won the jackpot, it is funded by the combined prize pool that all Powerball lottery jurisdictions contribute to.
Now the lotteries have calculated the cash value. Next, it’s time to figure out the annuity jackpot amount – that’s the big advertised jackpot. To do that, lotteries apply the best available interest rates to the cash option and calculate what its value will be after 30 yearly instalments. Different interest rates are used to determine each jackpot, so the cash value is not simply a fixed percentage of the annuity amount.
By the way, if a jackpot winner chooses the annuity, they’ll never receive less than the advertised jackpot. Powerball and Mega Millions and all the participating jurisdictions take the financial risks upon themselves to guarantee that the annuity value will be fully paid.
So, the advertised jackpot and cash value are made public, ticket sales for the next draw have finished and the draw is about to be held. You’ve probably seen that during or after the draw, the advertised jackpot is often changed to a somewhat different value than the advertised amount. What’s that about?
After ticket sales close for the draw break, the lotteries take the actual sales data and update the annuity and cash amounts. That’s why the advertised jackpot is always estimated, because the jackpot amount can’t be finalized until this process occurs.
If someone wins the jackpot, the amount resets to its current starting level of $20 million for Mega Millions and Powerball. If no one wins, the process to calculate the next jackpot starts all over again.
Where Does the Rest of the Money Go?
Around one-third of ticket sales go to fund the top prize pool, so you may be asking where the remaining two-thirds of ticket proceeds go. That varies by state, but generally some of the revenue will fund important programs within the state, like public schools, and some will be paid to retailers, lottery staff members, and go towards funding lottery costs.
And, as mentioned above, the states fund the non-jackpot prizes from their own ticket revenue, rather than drawing on the combined pool for the jackpot. So each state will fund all the non-jackpot prizes won by tickets purchased in that state. The non-jackpot prizes have fixed amounts – for example, both Powerball and Mega Millions offer a $1 million second prize for matching the five white ball numbers. These amounts remain the same and don’t depend on the size of the jackpot. So, whether one ticket or 100 tickets wins this prize, each winner will receive $1 million (or more if they added Megaplier or Power Play).
The jackpot, on the other hand, is what is called pari-mutuel, meaning that it’s not a fixed prize amount and grows based on ticket sales. Another feature of pari-mutuel prizes is that if there are multiple winners, they will all share the prize equally. As you probably know, that’s exactly what happens when multiple Powerball or Mega Millions tickets match all six numbers to win the jackpot – the prize is split among all the winners.
Jackpot Calculation Recap
To calculate the next jackpot, lotteries take the cash on hand and project the ticket sales to determine the cash value, which is a fixed 32.5% fraction of sales. They then apply the interest rates to the cash value to arrive at the advertised annuity amount.