Friday’s Mega Millions jackpot now at $1.35 billion. Are these huge jackpots mirages?

With the buzz growing over Friday night’s $1.35 billion Mega Millions drawing, there’s a little-known fact behind that eye-popping whopper of a jackpot that ranks as the fourth-largest lottery in U.S. history.

Like everything else these days, it’s being turbo-charged by inflation. And the gap between the OMG number on the billboards and what the winner likely will take home is getting wider.

Most people who win the lottery choose to cash out on their winnings, meaning that they withdraw the money all at once and receive a reduced total. And ever since the summer of 2020, the gap between the value of cash-out prizes and the quoted totals that appear on signs plastered across America has grown considerably, a Bay Area News Group analysis of Mega Millions prize data found.

In August of 2020, winners who chose the cash-out option would have given up about 19% of the total value of the jackpot. But if someone wins Friday’s $1.35 billion jackpot and opts to withdraw the winnings all at once, they’ll only get about $708 million before taxes — a little more than half of the quoted amount.

What gives?

“We’re certainly not trying to mislead anybody,” said Carolyn Becker, communications director for the California State Lottery.

What’s happening, Becker says, is that rising interest rates are fueling the growing gap between the jackpot and cash-out amount. When a winner decides to take the full amount — which under lottery rules would be paid over three decades — instead of the lump sum, lottery officials invest all the prize money in U.S. Treasury bonds. With the federal reserve on a warpath with inflation, interest rates are rising and the cost of treasury bonds is dropping, giving lottery officials more purchasing power. So that means the total estimated value of the prize, after investments, is higher.

“In other words, if interest rates weren’t where they are right now, the advertised jackpot for (Friday) night would not even be a billion,” Becker said.

There are other factors affecting the value of lottery winnings. Becker said that changes to the Mega Millions and Powerball games made the odds of winning the jackpot higher but made it easier to win smaller prizes. That means jackpots often now roll over more frequently, fueled by hype and more sales, before a winner is declared.

The idea of winning more than a billion dollars in the lottery isn’t exactly becoming ho-hum, but here we are again — nearly two months after a Southern California gas station sold the single-winning ticket in the $2.04 billion record-shattering Powerball draw in November. That winner — and what they intend to do with the prize — is still a mystery.

Financial advisers say that taking the lump sum is actually the smart move. William Huston, whose company Bay Street Capital Holdings in Palo Alto advises lottery winners on how to manage their sudden wealth, says that winners often are better off by forming an investment team to manage the payout themselves.

“You need your investment advisers, you need your accountants, you need your legal team,” said Huston.

One major bonus if you buy the winning ticket in California? The Golden State is one of nine states that do not charge state income tax on lottery winnings — which translates to tens of millions of dollars saved in taxes if there’s a single-winning ticket sold here for Friday night’s drawing. You’d still have to pay federal taxes, so the take-home would actually be closer to $538 million.

Regardless of how the next winner decides to proceed, state lottery offices across the country are reaping millions in ticket sales off all these huge drawings. In California, for every $2 spent on a Mega Millions ticket, 80 cents goes to schools. And lotto officials really love to point that out.

“If a kid gets a saxophone in the band because you played the lottery … we like to think that’s a feel-good motivation,” Becker said. “We want to get people excited. And the reality is, I think you would agree, a billion dollars is far more exciting than a million.”