Dear Clients and Friends of Cornerstone:
The largest lottery in world history occurred this past January when the U.S. Powerball jackpot grew to $1.6 billion. Powerball players spent an estimated $2.6 billion on tickets between November 2015 and January 2016 until three lucky ticket holders finally held the magic numbers that gave each of them an estimated $327 million with a lump sum payout.
We all know that the odds of winning the lottery are astronomical, and for those who play it regularly – and not just when the jackpots hit the stratosphere – your weekly habit might be detrimental to your long-term financial success. This month’s article outlines the statistics on annual lottery sales and the odds of winning vs. taking those same dollars and investing them into your 401(k). The facts may surprise you!
If you would like to refer back to any previous newsletters we have published, you can find them on our website. Please be sure to visit www.ccadvisors.com.
– Cornerstone Capital Advisors
How to Become a Millionaire
|Steve Renner | May 26th, 2016
Kick Your Lottery Ticket Habit
The odds of winning Powerball are 1 in 292 million. The odds of winning Mega Millions are 1 in 259 million. The odds of winning Ohio’s Classic Lotto are 1 in 14 million. But if you were to invest the money you would normally spend the lottery into a 401(k) plan, your chances of winning big are all but guaranteed!
I recently found myself standing in line at a local convenience store behind a guy who was in the process of redeeming his winning $2 scratch-off lottery ticket for another chance to uncover his fortune. My mind started to wander and it wasn’t long before I starting wondering how much the Ohio lottery takes in every year and how a person’s lottery habit could be transformed into a pretty substantial retirement plan.
According to the annual report from the Ohio Lottery Commission, about $2.8 billion was collected by the Ohio Lottery between July 1, 2014 and June 30, 2015. Perhaps even more shocking is that more than half of these funds, or $1.55 billion, was a direct result of instant ticket sales – the scratch-offs! Since we know that Ohio has about 9 million residents who are 18-years-old and legally permitted to play the lottery, we can conclude that the average Ohioan is spending $323 annually on the lottery. (And since I know that I spend $0, I can only assume that there are men and women out there spending $600 or more on lottery tickets every year!)
For Fun or For Money?
Whether you view the lottery as a form of inexpensive entertainment or “a convenient and accessible tool for radically altering [your] standard of living,” if your objective is to obtain financial security … there’s a better way.
Countless studies have been conducted in order to explain why those with lower incomes tend to spend more of their income on the lottery. Some of the reports are simply astounding. Just a decade ago 21 percent of those who played believed that the lottery was the most practical path to wealth. It’s this skewed thought process that continues to drive lower income residents in particular to spend a significant portion of their income on these tactics rather than invest in more effective wealth enhancement solutions.
Your Money Multiplied
Let’s assume a 30-year-old who normally spends $25 a week on the lottery (or $100 a month) decides to invest these funds into a 401(k). What would happen to the investment if we were to assume the following conditions?
In 35 years, the $100 he previously spent on the lottery plus the $50 his employer is kicking in would come to around $344,000 when you factor in the 8% average annual return. What’s incredible to consider is that over the course of 35 years, this individual will have only invested $1,200 per year of personal income (or $42,000 total).
Now, what if the employee decided to kick their monthly $100 lottery habit earlier at the age of 21? If we were to apply the same conditions outlined above, in 44 years (when the employee reaches age 65), the same investment and company match would result in a 401(k) plan worth $1,457,677. Over the course of this 44-year career only $52,800 in personal funds would be contributed to the plan, but with the company match and 8% average annual return, the funds would continue to multiply – 27 times to be exact!