Why Don't the ultra-Rich Play the Lotto When the Payout Exceeds the Odds?

Can the Rich Get Richer from playing the lottery? Let's look at this together.

If there's a mega-lottery in your state, you've probably noticed that the state usually has no problem in updating you about how the lottery jackpot has risen. In the Mega Million Jackpot Game, for instance, we can quickly calculate the total number of possible odds:

The game is as follows. There are two barrels of 56 balls each (numbered 1-56). 5 are chosen (without replacement) from one barrel, and 1 from the other, called the Mega Ball. So technically, you can have a number output of 13,18,21,31,47 and Mega Ball 47. The total number of combinations possible is a shade over 175 Million. If you're an avid lottery player, you should understand that you will ALWAYS have less than 1/175,000,000 chance of winning, no matter what the payout is. The payout is independent of your odds of winning. However, there is a better chance of the winning combination being selected as the jackpot rises (because more people play).

The game costs $1 per ticket entry. Which brings us to an interesting question--why doesn't Bill Gates, Warren Buffet, Oprah, or even high earners with say, $300 Million in Cash play the lottery when the payout is over $175 Million? If the Jackpot reaches $200 Million, and you play all 175 Million Combinations, you are nearly guaranteed a $200 Million Payout, right?

Well, this would be a good case where statistical analysis seems to make sense, but it's the real-world analysis that brings such a pie-in-the-sky idea back down to earth. Even if a billionaire put up the numbers, it would be as impossible

1. It would be a Logistical Nightmare.

- Imagine trying to go and print 175 million ticket combinations. Let's say it takes 1 second to print 1 line of numbers. 175 Million seconds of consistent printing would be needed--2,025 days--that's if it prints 24 hours a day, 7 days a week.

- The lottery numbers are drawn every Tuesday and Saturday, so you will need to draw it down to less than three days. Which means say rich guy would need some help. A lot of it. You would probably need about 2,100 people (700 people, 3 shifts) to convince 700 lottery retailers to allow them 24-hr, dedicated access to their machines (with NO pesky other customers), and they could do it under three days. (You will have to pay them all of course).

- Plus, we haven't even counted all the time it takes to fill in all those bubble-in sheets (Quik-Pik won't work because you run the risk of selecting the same numbers twice).

2.They Better be the Only Winner. Getting past the near-impossible logistics of actually playing all the numbers in the alloted time period, the rich guy would have to win the entire jackpot. If there is even one other jackpot winner, your "potential benefit" becomes an guaranteed loss.

3. Uncle Sam Gets a Cut. Also, you must take into account taxes, Capitalism's Conscience. A $200 Million Jackpot will only net you about $69 Million after taxes according to this lottery tax calculator if you live in a state with 6% income tax. (This assumes a "middle class" tax bracket as well).

4. Most millionaires are too smart to play. If you're a self-made millionaire (and most are) chances are the lottery didn't get them to where they are. There are an estimated 2 - 8 millionaires in the US, and even controlling for Fortune 500 Execs, Professional Athletes, Actors, and Entertainers, and Lottery Winners, there are still Millions more who got there without having to have superior talent. You just have to be smart with your time and your money. Small businesses, regular investors, retirees, etc., are the ones who make up the bulk of the millionaire pie. And there's plenty of room for more.

I would encourage you not to stuff more than 1% (if any) of your income into lottery playing--and it should still be included into your regular "entertainment" spending.

MSN to Twenty-somethings: Take Note!

So last week I posted an article on "Reckless Saving" on which I..disagreed with. There was an excellent rebuttal written by another writer for the same website which you can read here. Ok, on to today's topic.

I think it's important to re-emphasize the importance of time vs. money when you are working and investing a portion of your salary. Starting in your 20s to prepare for retirement is no new trend--I've come across many folks who plan to "retire" at 30 or 40. I don't know what they plant to do for the next 40 years after that, but that's another story that you can share in the comments section if you fall in said category.

But if you plan to slowly build up your investment income and retirement level, consider the following insight from MSN:

Imagine, for example, that you want to have $1 million by the time you retire in 40 years. That would be enough to provide an annual retirement income of $40,000 for the rest of your life.

But in fact, you’ll need $3.26 million, because if inflation averages 3 percent a year, that's how much it will take to buy what $1 million buys today. The $3.26 million should produce an annual income of $130,000 — equal to $40,000 in 2007.

I know what you're thinking--$1 Million would be plenty to live in retirement, right? I mean by then you would have paid off your home, sent the kids to college, and cut down your diet to the essentials of applesauce and medicine. (Well, maybe it won't be that bad.) However, there is some truth to the hidden tax of inflation--$1 Million went way farther in 1967 than in 2007 and rest assured that in 2047 $1 Million would get you even less.

As we've said before, it's not the money that matters. It's the time:

Start investing now and earn an average annual return of 10 percent — ambitious, but possible — and you’d have to invest about $7,400 a year to get to $3.26 million in 40 years. But if you wait 10 years to start investing you’ll have to set aside nearly $20,000 a year.

Yikes! Waiting a simple 10 years (meaning if you start at 33 rather than 23) you would have to expend three times as much money to retire with the same nest egg at the same point. (And that's over a 40-year horizon). It's tough sometimes--you get out of school and being responsible is the last thing on your mind--most feel that they will "always have money" and don't bother investing at all. Then you'll hit 30 or so and suddenly it's time to "get serious." Why wait till then?

The source of my quote above come from an informative MSN Article on advice for young investors. There's other tidbits on getting involved in mutual funds (and less on individual stocks), watching those fund fees (just get an index fund), and having the discipline to pull out of the market as it ebbs and flows. Good reading material.

I'll be traveling again, so make sure read about other blogs to the right (Face Bookers click through to see what I mean). And do me a big favor? Make sure you mention that I referred them to you. Traffic exchange and all :-)

See you soon.

Young and Confused…or Maybe Not?

So I found this article via TheStreet.com, written by Cliff Mason an-up-and-coming 20 something who wrote about "reckless saving." I read with interest with the pull-in line that advised young people "not to save money." Continuing in disbelief, he continues the theme with the following gem:

Many of you thought I was being reckless and irresponsible when I advised young people not to save money. I couldn't disagree more strenuously. There's no percentage in being a paragon of self-restraint and spending discipline while you're in your early 20s.

I was stunned that this guy works for a major financial media agency. The only saving point I can pull out of this is "early" 20s (he's 22). I'm 26, and I think I'm starting right on time (I began funding my 401(k) at 25). Perhaps he says this because most people in their early 20s have little or no money to save. However, he kills any last remaining hope I have for his philosophy when he states the following later in the article:

If anything, you're taking a dangerous and unnecessary risk if you try to be disciplined about money in your 20s. The risk is that you might make it to 30 or 40 without ever having had a prolonged period of irresponsibility in your life. And it's not just your youth that's at stake, it's your future.

If you spend your 20s grinding away, trying to follow all the financial disciplines that we're told make you a responsible adult, you'll never get the recklessness out of your system.

So, this is what he's going with. The two main points I've pulled from his article (you can read it to see if I've misled) is that between 20 and 40 there two extremes—you either save/invest your money OR you can live the fantastic life, but definitely not both. It's an unfortunate false choice.

As with anything in life, balance is the key. You should work to save what you can as early as you can. If you start in your 20s, saving 8-10% of your income in a 401(k) is a great idea because you have time to outlive the risks and market fluctuations and still do well. Not to mention that many companies will add more money to your contribution (free money). Waiting until you're late 30s or 40s to get started just makes things much harder. Plus, we've covered the importance time has over the actual money invested, here—with the actual Excel math calculation.

That being said, I think Mr. Mason is smart—he probably wrote the article to get a rise out of some readers. (He got me). I also think he makes some good points about how kids can't be kids these days with over-scheduling and rigid discipline (but I thought our generation was lazy and undisciplined…) which I could agree. It's not all about money, but with the protective safety nets projected to get smaller (Social Security, rising costs of health insurance, decline of pensions, and rising taxes) the burden of providing for your future days are falling more on the individual.

But maybe I'm just being too much of a financial "stiff"...what do you readers think? Does this guy know what he's talking about?



By the way, regarding our stock market game. Two points to understand-- (1) It's not too late to join us. (2) This game is to help people have a long view of the stock market. If anything, the game should be even longer, but I figured that it would be hard to keep people's interest for a year. Also, I don't know who 2win or SS07 are. If those are you, send me an e-mail or Facebook message.