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Don’t Bet on the Lottery to Fund Your Retirement


By Brittany N. Cox,
Registered Investment Advisor at Nestlerode & Loy Investment Advisors

Most people know that you have a better chance of being struck by lightning than winning the lottery, right? That doesn’t stop more than half of adult Americans from buying a lottery ticket each year. If they were giving away a new home to just one person out of everybody in the six most populated U.S. states, that would equal your chances of winning the lottery. Of course, someone will win, and you can only win if you play.

More than half of all U.S. adults collectively will spend approximately $50 billion each year in hopes of getting rich. According to a study by the North American Association of State and Provincial Lotteries (NASPL), in Pennsylvania, 29% of players accounted for 79% of lottery revenue. Many of us look at the lottery as just one of those leisurely things we do in hopes to win a few extra dollars. But, for some folks, who often don’t have much discretionary income to spare, the lottery is a serious drain on their funds. They spend more money than they have available in hopes of winning enough money to pay their bills and live.

In 2011, MegaMillions published a headline on their website titled “Save for Retirement.” Anti-gambling groups were in an uproar at the lottery’s attempt to spin playing the lottery as funding a retirement. The lottery officials say they were simply trying to make people dream about how they would spend their winnings, not create a financial strategy.

Most of the people who play the lottery spend an average of $5 per week on buying lottery tickets. So, looking at the numbers provided by Investopedia, if a person spends $5 per week on lottery tickets, it would cost $260 per year. A study in Texas found that a person spent an average of $250 per year on lottery tickets. If that same person would have started a retirement account that earned a conservative average of 4% annual return with $250 in contributions per year for 30 years, they would have about $15,400. If they continued the contribution for 40 years, they would have more than $25,000. While the market does not carry a guaranteed return, this shows that your odds of having $15,000 in 30 years are much greater than the 125-million-to-one odds of hitting the lottery.

Some people will say their lottery donations go to a good cause. Where does your lottery dollar go? In Pennsylvania, 65 cents of each dollar that goes into the pot goes back to the winners’ prizes. Twenty-six cents go to benefit programs, seven cents to retainer and vendor commissions, and 2 cents to operating expenses. The Pennsylvania Lottery remains the only state lottery that designates all its proceeds to older residents. In the 2017-18 fiscal year, PA Lottery sales reached more than $4.2 billion with more than $2.7 billion in prizes paid out and $1 billion supporting older Pennsylvanians.

The proceeds of the PA Lottery can even be seen right here in Centre County. Within the county, over $2 million was paid out to the Area Agency on Aging and senior centers. Over $700,000 went to the shared and free-ride program administered by the Pennsylvania Department of Transportation. More than $1.6 million was paid to property tax and rent rebates and $1.5 million to care services administered by the Department of Human Services.

While the lottery revenue supports a good cause in Pennsylvania, it is not a good financial strategy to fund your retirement goals. Be sure to work with a financial advisor to make regular contributions to a retirement account to ensure you are on the right track to those goals.

While you dream about lottery winnings, make sure you have a backup plan. As tax season is in full swing, consider maxing your Roth IRA or Traditional IRA contributions with $5,500, or for those age 50 and older, $6,500 to get the full benefit. You should also note that the maximum contribution limits have increased for 2019 to $6,000 for people under the age of 50, and $7,000 for those age 50 and older. Now is a good time to review your 2018 contributions and plan for 2019.