Win Your Own Lottery

How often do you play the lottery? It’s not uncommon for routine lotto participants to spend $1,000 or so per year chasing this “get-rich-quick” gambit.

Buy a ticket and win $100, a $1000, perhaps $1,000,000+ against overwhelming odds. Recall the incredible $1.537 billion drawing won by a single South Carolinian. The odds of winning that prize exceeded 1:302,000,000, roughly the same odds as one citizen in the United States (population 333,000,000+) being selected in a drawing to win the big prize. It happened, but it wasn’t you… or me… or all the other 333,000,000+ Americans.

Improve Your Odds

How about reducing your odds from 1:302,000,000+ to a more believable 1:1 depending on how patient you are over the next 45 years? Here’s the deal. For those of you in the early stages of a career (say 22 years of age), instead of buying $100/month of lottery tickets, contribute an initial $3,000 (the initial minimum contribution in after-tax dollars) to a Roth IRA and deposit the $100/month (again, after-tax dollars) of “lottery savings” into the Roth for 45 years. Invest every penny of it in Vanguard’s Total Stock Market Index Fund, Admiral shares, compounded quarterly (which has earned a return on investment (ROI) of 7.14% since its 2000 inception – and Voila! you wake up on retirement morning with a $466,000 balance in your Roth account. This is in addition to Social Security, your work-related 401(k) or 403(b), your home, and all the other assets and retirement savings you’ve accumulated during that same period.

Because folks purchase lottery tickets with after-tax dollars, I assumed a $3,000 initial investment (the required minimum) and the $100 monthly contributions would fund a Roth IRA. In retirement, Roth IRA withdrawals are tax-free. The VG Index Fund’s 7.14% ROI is based on the fund’s returns since its 2000 inception. I made no inflation adjustments. By the way, the Total Stock Market Index Fund has earned, on average, 13.82% over the last 10 years, so using 7.14% in my hypothetical example doesn’t seem overly optimistic… but who knows?

Food For Thought

Okay, so it doesn’t sound like much compared to $1.537 billion, but think about that $466,000 every time you walk into a convenience store during the next 45 years and throw down a few loose “after-tax” dollars for a lottery ticket. I’ll take the 1:1 chance of ending up with $466,000 upon retirement versus those long odds of being extremely lucky. But remember, to gain these improved odds, you have to be very disciplined… and very patient.

A Bird In Hand

Speaking of the lotto, a quizzical subscriber asked me the following question: If you became a lucky winner and had the choice of taking $50,000 today or $80,000 spread evenly over 30 years, what would you do? And how would you invest the money in either case? In responding to these questions, I assumed that in both cases the money was invested in taxable accounts to avoid muddying the water about who might be eligible to place those winnings in retirement fund vehicles.

As usual, in both cases, my investment choice would be the aforementioned index fund. As to the cash, I would invest the lump sum assuming an annual return of 7.14%, compounded quarterly, which mathematically would grow to $418,000 before taxes and inflation after 30 years. In the second case, I would invest the larger sum evenly over 30 years (assuming the same yield of 7.14%, compounded quarterly), which mathematically would grow to approximately $312,000. Granted, my approach is very simplistic, but it certainly reaffirms the value of “a bird in hand” even when it’s a smaller bird.