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The lottery was the talk of the office around the water cooler as people contemplated if they would have enough winnings to buy a stake in the Los Angeles Dodgers or if they could buy a house with nothing but closets for shoes. I remember watching the jackpot grow larger and larger with more and more media coverage to the point that a CPA and financial planner I know really well was even becoming giddy with anticipation. Then some people won. Then I had the idea for this post.
Let me be clear, unlike many financial planners, I have no quarrel with the lottery. My wife and I play ourselves, but only 1 ticket a piece and only when Mega Millions exceeds $300 million. It’s fun and it’s exciting. Those two dollars it costs us are easily made up by drinking water at dinner instead of a Coke one evening and have no impact whatsoever on our family’s financial status. I also appreciate the fact that the lottery program will hopefully one day help pay for some little Presleys to go to a college located in the serene town of Athens, GA. My only beef with the lottery is that some people unfortunately view it as a plausible retirement plan. They gamble to the point that it actually impacts their financial status - now and in the future. Sadly, there are people who do that.
According to a pair of surveys commissioned by the Consumer Federation of America and the Financial Planning Association several years ago, 21% of Americans believe that “winning the lottery represents the most practical way for them to accumulate several hundred thousand dollars.” According to Bloomberg, Georgia residents spent an average of $470.73 per person on the lottery in 2010. $470.73! Massachusetts, New York, Michigan, and South Carolina residents weren’t far behind. The Bloomberg article also points out that Georgia’s lottery payout averaged $.63 for every $1 played. Hold on just a second…
If I’m an average Georgia resident and spent $470.73 on the lottery, and let’s suppose I spent it all on January 1st agreeing not to play anymore other than my winnings for the rest of the year, what would be my investment return? Well, a $.63 payout for every $1 played would mean that on January 2nd I would have $296.56 (470.73 x .63), on January 3rd I would have $186.83 (296.56 x .63), on January 4th I would have $117.70 (186.83 x .63). Guess what? At that investment return rate, I would not be able to afford a $1 Mega Millions ticket by January 14th! This is also assuming I win every day January 1st - January 13th, and that is a bad assumption to make considering that according to Bloomberg’s study, “state-run lotteries have the worst odds of any form of legal gambling in America.”
According to ABC, the odds of winning Mega Millions on March 30, 2012 were estimated at about 1 in 176 million. The article points out that you have a greater chance of getting struck by lightning 500 times before you win Mega Millions. I’d like to point out that you also have a lesser chance of winning Mega Millions than:
- Dropping 2 grains of sand in exactly the same place consecutively, blindfolded
- Getting a royal flush on your first 5 cards dealt
- Dating a super model
- Bowling a 300
- Finding a pearl in an oyster
- Dying from using a right-handed product if you are left-handed
Do I need to tell you that if you took the before mentioned $470.73 that an average Georgia resident spends on the lottery and invested it at the beginning of every year in a prudently diversified portfolio with an average return of 8% over 30 years you would have around $57,000? That’s a pretty good jackpot in my book, and it comes with better odds!
Play the lottery from time to time. Have fun, but know when enough is enough. Remember that playing the lottery is probably not going to net you mind-boggling wealth, and repeatedly or substantially playing the lottery is likely hurting your financial situation, well, unless you win.
-Tom
Excellent food for thought!
ReplyDeleteTom, I absolutely love to read your column! So informative.
ReplyDeleteExcellent post today, Tom! I am ready to hand over my $470.73 to you to put in that diversified portfolio! I can think of a couple of people who might appreciate it in 30 years! Keep up the good work!
ReplyDelete