Friday, December 14, 2007

Why Playing Lotto is NOT Saving & Other Retirement Reality Checks

Today I picked up some wine for the pot-luck party M & I are throwing tommorrow and out of habit I glanced at the lotto machine by the cashier. The jackpot wasn't above $200 million, so I wasn't tempted, but there is always a steady stream of people scribbling in their numbers. Lotto is obviously gambling, but it's also, in a warped sense, a form of saving and investing for many people. And that is the scary part.

The 2005 Retirement Confidence Survey cites 14 percent of Americans who are not saving a penny for retirement play the lottery at least once a week. Whoa. The current undulations of the Dow have better odds than one in a million. Face it, if you play lotto you are a disciplined investor, someone who removes a dollar or two from their wallet, like clockwork, with the hope that it will come back to them in a bar of gold. Kind of like Apple stock, or AT&T, or a company that makes solar panels. The obvious difference is that one involves suspension of reason, and the other does not. But the discipline is there, it just got hijacked by better marketing. Because the reality is that a lot of people who play lotto daily are working class and/or poor. Fidelity, Vanguard, Fortune magazine, and MarketWatch are not exactly targeting them for marketing and education on how to properly save and invest for retirement.

By being cut off from the world of investing, like NYC's bartenders and waitstaff, you tend to think that you can't save. What, you think some white collar cubicle jockey gets to decide what percentage of her paycheck goes to health insurance? What percentage towards her 401K in order for the matching investment to kick in? You think they want to take home a smaller paycheck? They're not necessarily better at saving, they just have the opportunity to have less choice in the matter.

My feeling is this, whether you're a hair above the poverty line buying lotto tickets every day or the MaƮtre d' at Balthazar tipping $20 each free round of drinks at a friend's bar, disposable income is disposable income, and that's the part that you slice up for savings. You don't need to be wealthy to invest, you need to have disposable income and discipline. And guess what, mutual fund company T. Rowe Price will take as little as fifty bucks a month with no money down. You can read more of my it's easy-to-save-for-your-retirement tirade here.

So let's put it this way, $20 a month in lotto tickets for 30 years will get you jack $h*T, and $20 in an index fund returning 9% a year for that same period will get you $34,288. It's not enough to retire on, but this example, like playing lotto, is no retirement plan. It's just an illustration of what jack $h*t could look like instead of, you know, jack.

The Financial Planning Association is a professional group for financial planners, and they have a great list of stats that are a good wake up call. Here are some of my favorites-

"20 percent of Americans actually believe winning the lottery is their best shot at accumulating several hundred thousand dollars over their lifetimes."
- 2005 Consumer Federation of America and Financial Planning Association consumer survey

"[Americans] have the lowest personal savings rate since the Great Depression - in January 2006 it dropped to minus 0.7 percent."
- April 2006 Workforce Management

"A large percentage of American workers see that the U.S. retirement system is going through major changes, but many are not taking steps that are likely to leave them well-positioned for a comfortable retirement."
- 2007 17th annual Retirement Confidence Survey (RCS)

Creating wealth by saving a little at a time over a longer period of time is not the same as hitting jackpot, but it is the odds on favorite. If you like dreaming big, just dream that Steve Jobs is gonna keep on inventing computerized crack and buy his stock. And this part is important- like playing lotto, you don't need to be wealthy to have that discipline. It's getting close to New Year's resolution time. Time to max out your 2008 Roth IRA and steer yourself towards retirement and away from the lotto line.


Mrs. Micah said...

Plus, when a lot of people win the lottery it screws up their lives. Probably because they don't know what to do with it and haven't developed money management skills. Maybe also because it's seen as a windfall.

And then people seem to expect lotto winners to blow it all at once instead of saving or investing it. They come asking for money or trying to sell them things.

Would I like to win the lotto? Yes, but I won't since I don't play. I don't ever play because I think that the end isn't worth it even if I won.

Debt Dieter said...

I've always found this fascinting that someone would honestly put their faith in winning to lottery to fund their retirement?

April said...

Thanks for the reality check...i have had too many a night lost to winsomnia. How does collecting comics, baseball cards, art, antiques stack up against the lotto in your opinion?

PiggyBankBlues said...

collectables can actually be worth money. it's not at all like the lotto in that lotto's randomness and high odds of winning make it the same as gambling. there is an actual market for collectables, but of course like all markets (including the stock market) you have to educate yourself and follow it in order to track your investments. i might not be retiring on my derek jeter rookie card, but it's worth more than a busted lotto ticket...

SavingDiva said...

It's frustrating that people put money into the lottery every month, but nothing in a retirement fund...UGH!