Winning the Retirement Lottery

This morning, I read some disturbing financial news. No, not gloomy predictions of the global economy soon falling into a deep recession or alarming signs that the dollar is crumbling or even dire warnings about the widening foreign trade deficit -- I've heard them all before. The story I'm referring to comes not from the mouths of pontificating economists, but straight from John and Jane Dow, average American consumers.

According to a recent survey by the Opinion Research Corporation for the Consumer Federation of America -- try saying that three times fast -- a surprisingly large percentage of Americans believe that hitting the lottery is the most "practical" means of amassing a retirement nest egg. In fact, around one-quarter of those surveyed indicated that the relatively modest sum of $200,000 was simply out of reach without the help of a winning Powerball ticket. Among those with lower incomes, that percentage was even higher.

It won't happen to you
After doing some homework, I discovered that this same group teamed up with Primerica to sponsor a similar survey in 1999 with equally troubling results. The world was a far different place back then (you know, before the iPod), but apparently many of us still believed that it was easier to match a few numbers with a $1 ticket than to wring any extra money from an already stretched budget.

Certainly, it's easy to understand how many cash-strapped families find it difficult to set aside much money. In fact, the nation as a whole is still on a prolonged shopping spree that has seen the national savings rate dip to zero. Still, it boggles the mind to think that one in four of us is under the delusion that the lottery is the only solution.

According to the Powerball website, the odds of winning the top multistate jackpot are approximately 1 in 146,107,962. Amazingly, the Chicago Cubs are equally likely to win next year's World Series. Of course, your chances of hitting the smaller $200,000 prize are much less astronomical -- a mere 3.5 million to one against. Now, as a big fan of recreational gambling, I have no problem with buying a lottery ticket every now and then, but I'm not exactly banking my financial future on it.

One dollar at a time
While the thought of saving a single dollar might seem like a daunting task to some of us -- let alone 200,000 of them -- time and the magic of compounding can be powerful allies. With both on your side, it doesn't take a tremendous commitment to accumulate a substantial amount of money. And considering that the precise rate of return on most lottery tickets is somewhere in the neighborhood of zero, even the worst stock-picker on the planet would have better success by investing in stocks.

The lofty goal of $200,000 might still be far in the distance for many, but a solid portfolio of quality companies can bring it well within your grasp. Instead of a series of random numbers, why not consider placing your bets on stable industry leaders like Altria (NYSE: MO  ) , Bank of America (NYSE: BAC  ) , and Johnson & Johnson (NYSE: JNJ  ) . Considering the generous -- and rising -- dividend income that such stocks generate, you will find that small contributions can add up quickly. Consider the following example.

The table below illustrates the growth of a $1,000 initial investment and subsequent $100 monthly investments in a hypothetical stock with an initial $10 price that increases at 7% annually and pays a steady 4% dividend.

End of Year

Cumulative Investment

Share Price

# Shares

Value

Year 0

$1,000

$10

100

$1,000

Year 5

$7,000

$14

657

$9,222

Year 10

$13,000

$20

1,182

$23,251

Year 20

$25,000

$39

2,275

$88,042

Year 30

$37,000

$76

3,635

$276,706



With a conservative compounded annual growth rate of 7%, the stock would have risen from $10 to $76. Better still, the original 100-share position would have ballooned to more than 3,600 shares thanks to all of those reinvested dividends and monthly additions of capital. So an investor who diligently socked away just $25 per week could end up sitting on a quarter of a million dollars.

What's the catch?
Sure, you say, the math checks out, but how do I find such a company? The truth is, companies that deliver growing dividend payments as well as promising capital-gains potential do not exactly grow on trees -- but they aren't 146 million-to-1 long shots, either. In fact, think what the upside potential would be with two companies like Citizens Communications (NYSE: CZN  ) or iStar Financial (NYSE: SFI  ) . Both are Motley Fool Income Investor recommendations that yield not 4%, but a much heftier 8%. And as for total returns, the average portfolio pick has raced out to a 16.7% gain, outrunning the S&P by more than three percentage points.

If you still insist on playing the lottery, why not roll the dice on some of my lucky numbers (5, 11, 14, 17, 20, and 34). If you win, you can thank me by splurging on a trial offer (total cost $0) of the Income Investor newsletter.

And if you come up empty, consider taking the trial anyway. With access to lively commentary, top-notch research, and dozens of market-beating stocks handpicked from all corners of the high-yield universe, it might still be your best shot at the big bucks.

Regardless of his cheap shot at the Cubs, Fool contributor Nathan Slaughter is a loyal Cubbies fan. He owns shares of Bank of America but none of the other companies mentioned. Bank of America, Citizens Communications, and iStar Financial are Income Investor recommendations. The Fool has a disclosure policy.


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