Which Powerball Payout Option Is the Best?

What do 16, 34, 46, 55, 67, and 14 have in common?

Nothing important, because, once again, Monday's Powerball jackpot had no winner.

The pot has now reached an estimated $1.73 billion, which is getting mighty close to the largest lottery reward on record -- a whopping $2.04 billion, dished out last November. If someone wins at $1.73 billion, it would be the second-largest reward on record, beating out a $1.602 billion Mega Millions win from August of this year.

The next drawing will be on Wednesday, Oct. 11. If there's a winner, that person will have to decide if they want to take their prize as a single lump sum or as an annuity with 30 installments over 29 years. Most winners take the lump sum. But is that the best way to receive your lottery winnings? Let's take a look at both and see.

Lump sum: money now, smaller prize

Taking a lump sum means you'll get your lottery winnings immediately and all at once. In exchange for a single upfront payout, however, you have to accept a smaller lottery prize -- often less than half of what's advertised.

For instance, if you had won Monday's Powerball (then $1.565 billion), a lump sum would have yielded $686.5 million, according to the lottery site usamega.com. That would mean sacrificing about $878.7 million. After taxes, however, you would have had about $432.5 million.

Annuity: full prize, smaller annual payouts

The annuity option yields the entire lottery prize over 30 installments. So, for Monday's lottery, you would have received an average net payout of $32.9 million every year (after taxes) for the next 29 years, plus one this year. That would yield a grand prize of about $948 million, again after taxes.

Which payout is better?

On the one hand, the annuity appears to be the better choice. At the end of 30 installments, you'll have more than double what you would have had with the lump sum. Plus, breaking up your lottery winnings could add "insurance" against overspending. You might feel less tempted to, say, buy a $100 million superyacht when you don't fall into immense wealth all at once.

What about if you want to invest your winnings? Which payout option would be best then?

For example, let's say a lottery winner is interested in investing their winnings in an S&P 500 index. They take the lump sum ($432.5 million after taxes), save 25% of their prize (about $108 million) and invest the rest ($324 million) in the S&P 500. If we assume an annual compound growth rate of 10.7% for this index (which is the S&P 500's compound annual growth rate over the last 30 years), that $324.4 million would grow to $6.178 billion in 29 years -- almost four times the jackpot's advertised value and more than six times what you would have gotten with the annuity (after taxes).

Now let's try the same scenario but with the annuity. Again, the lottery winner spreads 25% of their annual payouts (about $8 million) in bank accounts and invests the rest (about $25 million) once a year for the next 29 years. Assuming again a 10.7% annual compound growth rate, the prize would grow to $4.698 billion -- almost one and half billion less than the invested lump sum.

Investing the lump sum, then, could give you more investing potential. Of course, this doesn't factor in capital gains taxes, expense ratios, and other investing fees. It also assumes you would practice delayed gratification and invest a significant amount of money, which, come on, if you're the kind of person who wants your entire Powerball payout at once, are you also the kind of person who would invest most of it?

My take

Personally, I would take the annuity. Receiving a guaranteed $32.9 million each year for the next 29 years would give me immense security and peace of mind. It would also prevent me from squandering it, which I hope I'm not that kind of person, but having never had immense wealth I suppose I don't know how many yachts I'd buy (or, more likely, how many rare books I'd buy for my personal library).

All in all, either option would change your finances overnight. We'll just have to see on Wednesday if someone has a ticket with those lucky numbers (and claims their win) -- or if the prize will inch closer to being the largest of all time.