Tuesday, May 21, 2013
Lotteries Are For Losers
One of the big stories this week is about the latest Powerball lottery winner. We don't know who it is yet, but the winner won more than $590 million. That may sound like a great thing, but in reality there is a lot of Stupid going around when it comes to lotteries.
Stupid Fact One - You're Odds of Winning Are Less Than in Vegas
In Vegas you will see casinos advertise that they payout 97 percent on slots, meaning for every dollar bet by the public, the casino keeps 3 cents and returns 97 cents in prizes to winners. With government lotteries you are most likely only seeing 50 percent used for prizes. The government keeps the rest, plus it taxes your winnings.
Stupid Fact Two - Lotteries Don't Provide More Revenue to State Projects
Some people who won't gamble in Vegas are okay with spending money on lottery tickets because the money goes to a good cause. Not really. Whether lottery revenue is used for schools or parks or some other popular government program, state legislatures have long figured out that if their state lottery is a source of revenue, they can cut funding from regular tax sources. So lotteries don't really bring in more money for these favorite programs.
Stupid Fact Three - Lotteries Are A Lousy Investment
Except for social security payments that workers are forced to pay, most Americans set nothing aside for retirement, and yet millions of Americans spend $30 or more each month on lottery tickets. If they win big they are set for retirement. Remember, the government is only giving back 50 percent in prizes so in order to have any chance of winning you have to play a lot, but even if you win, you don't win much. Walter Hickey with The Business Insider reports that to have a 99 percent chance of winning the lotto you have to buy 145 $2 tickets. The most common prize is $4. Do the math, who wants to spend $290 to win $4? Stupid. Plus, even if you win a big prize, guess what? The government could take up to 50% in taxes.
What would happen if you took that same $30 per month wasted on lottery tickets and invested it in a Roth IRA mutual fund from age 18 to age 67. That's a total of $18,000 invested over 50 years. Based on past stock market history, it is very possible that your investment could grow at an average 8% per year and you would have around $250,000, tax free. If you managed to earn an average 10%, you would have around $500,000, tax free. And if you managed to earn an average 12%, you would have around $1,000,000, tax free.
Weigh the difference -- the potential winnings from 9,000 $2 lottery tickets or $250,000 to $1,000,000?
Stupid Fact Four - Lottery Winners Lose it All
You may or may not be surprised to learn that over 70% of big lottery prize winners go bankrupt. The type of people that think lotteries are a smart investment are not likely to all of a sudden smarten up when they become millionaires. The lives of many past lottery winners read like a tabloid -- divorces, affairs, scandals, court fights, even murders. It turns out the same skills it takes to Get Rich Quick are the ones to Get Poor Quick.
Repeat after me -- Lotteries are for losers.