Are Lotteries Really a Retirement Plan or a Tax on Ignorance?

“I feel like a fool throwing that kind of money away,” said Jesse, a retired soldier at a Milwaukee grocery store who doubled his regular weekly ticket spending to $55 for the $640 Million dollar jackpot. “But it’s a chance you take in life, with anything you do.”

Was Jesse foolish to be, in his own words, “throwing that kind of money away?” It’s true that you take “chances” in life. It’s also true that not all “chances” have the same odds of a positive outcome. If I’m standing on a treeless hill in a thunderstorm with a golf club raised high above my head, am I taking a chance with substantially greater risk than playing on a sunny day? What do you think? Are my odds of a positive outcome substantially improved because I’m taking a greater risk? What do you think?

Consider that if the Jesses of this world normally spend $27.50 each week for lottery tickets, that’s $1,430 a year. If Jesse invested the same amount in a well diversified, structured portfolio, regularly re-balanced over the same number of decades he would otherwise play the lottery, based on average historical returns, he might reasonably average 8% or more, with some years up and some down, and build a portfolio reaching $65,000 in only 20 years (say from age 45-65), $161,000 in 30 years (35-65), $370,000 in 40 years (25-65), and $820,000 in 50 years (15-65 or 25-75). If invested in a Roth IRA, the gains would be tax-free, unlike lottery winnings which are fully taxable at rates that can eat up close to half depending on the amount. And what if Jesse regularly invested more than the pocket change he felt he could afford to lose on lottery tickets?

Don’t get me wrong. I’m not against gambling on a lottery ticket for those who want to take a chance so long as buying lottery tickets is not their idea of retirement planning. For Jesse, it wasn’t; but for way too many, it is! So what are the odds of Jesse’s lottery earnings ever coming close to what he could have amassed by sensibly investing the same amount and watching his portfolio grow over time? Not even close. But the Jesses of this world don’t have time to think about that. They’re too busy buying lottery tickets. You may say, “Jesse’s retired. Why does he need to invest?” One word: inflation—many will live to be retired for more years than they ever worked. What about you? Are you saving and investing first, before buying lottery tickets? Is the way you invest based on sound investing principles or just hoping, like Jesse, that you get might lucky? Take the Investor Quiz and find out what kind of investor you are.

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