Lottery Nation

According to a pair of surveys commissioned by the Consumer Federation of America and the Financial Planning Association last year, a sizable portion of the American public is convinced that the best chance of acquiring real wealth is through winning the lottery. An even larger portion of the populace believes they will never amass even $200,000 over their lifetimes.

Balderdash. On both counts.

Myth No. 1: You can win the lottery.
According to the survey of 1,000 adult Americans, 21% agree with the statement that "winning the lottery represents the most practical way [for them personally] to accumulate several hundred thousand dollars." That's great news for lottery operators, but pretty depressing news for our nation, our educational system, and most of all, for the folks who hold this sad notion.

We all know that the chance of winning a lottery is just 1 in 80 million or so -- or we know that in theory. But too many people take the "80 million" as a given, and therefore not worth thinking about. They dream of the "1" and just hope against hope. Problem is, there is no hope.

I mean that quite literally. No hope. None at all.

Consider: On average and over time, for every $1 spent on a lottery ticket, a buyer can expect to receive approximately $0.44 back in "winnings." Now say you're a happy-go-lucky rich guy with $10,000 to blow on the lottery. Say you want to "invest" that money in lottery tickets and keep on "investing" the proceeds of your bets in even more lottery tickets. How long do you think you could keep this game rolling?

Answer: If you buy $10,000 worth of $1 lottery tickets on Day 1, then statistically speaking, you'll have $4,400 left to spend on Day 2. Do that, and by Day 3, you're down to $1,936. Keep going, and by the end of the week, you've got $31.93 left to your name. Five more days and you're all washed up -- just $0.53 in your pocket and too poor to buy another ticket.

Myth No. 2: Dang! Myth No. 1 was my only hope!
The survey's other frightening factoid was that only 26% of individuals surveyed believed they could ever amass $200,000 in savings over the course of their lifetime.

Ready for some irony? In 1996, state-run lotteries consumed $34 billion. That works out to a little more than $130 for every man, woman, and child living in the U.S. at the time, in 1996 dollars. Throw in the effects of inflation, and in 2005 dollars, it's worth $158. Want to guess how much you would have to put away every month in order to end up with $200,000 in your brokerage account at the end of 30 years?

Smart cookie. If you can put as little as $158 per month into a simple S&P 500 index fund, compounding at its historical rate of 10.5% per annum, then 30 years of diligent saving and investing will find you sitting on a little more than $200,000 in savings at the end. (And mind you, this is all in 2005 dollars -- not those inflation-eroded greenbacks they'll be printing in 2035.)

Myth No. 3: Huh? There is a third myth?
Indeed there is. What surprised me almost as much as the misconceptions revealed in the survey results, was the inherent misconception on which the survey was based: that if someone wants to become "rich," $200,000 will do the trick.

The fact of the matter is that, even with a portfolio constructed entirely from above-average dividend-paying stocks, you'd find yourself hard-pressed to get by on the income stream that $200,000 can generate. Take a look at a few popular examples:

Company

Dividend Yield

Annual Return on $200,000

General Motors (NYSE: GM  )

3.4%

$6,800

General Electric (NYSE: GE  )

2.9%

$5,800

Ford (NYSE: F  )

2.4%

$4,800

Kodak (NYSE: EK  )

2.4%

$4,800

ExxonMobil (NYSE: XOM  )

1.8%

$3,600



Worse, the average yield of a portfolio such as the one described above is 2.6% (which would, incidentally, net you only $5,200 per annum). If you go the simple route of investing in an S&P 500 index fund, however, your dividend yield would drop to 1.7%, and a $3,400 annual return.

You can do better
Fortunately, we have a solution that can help you achieve the survey-posers goal of $200,000 much faster than an index fund can. One that can help you surpass it and move toward the $1 million in net wealth that you would actually need to live comfortably in retirement.

The Motley Fool's Income Investor newsletter recommends that you invest in a select group of companies offering both strong dividend payouts and reasonable valuations. By sticking to this strategy in good times and bad, we have achieved returns of 20% since inception, beating the S&P average by nearly seven percentage points.

So how do you want to fund your retirement? Bet on a 1-in-80 million chance of winning the lottery, or follow a proven path to capital gains and a healthy payout? If the latter sounds appealing, you can sign up for a free trial today. Go ahead: The returns will beat anything you can expect from the lottery, and it won't even cost you a buck to play.

This article was originally published on Jan. 11, 2006. It has been updated.

Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things likethat.


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