You Won't Win the Lottery...

[Ravenous Wolf]

I hate to burst your bubble on this one...

--------------

Hey, you! You won't win the lottery!

Boomer Bucks by Barbara Whelehan • Bankrate.com

Do you play the lottery regularly? If so, do you really expect to win?

About one out of five Americans believe that winning the lottery is the most practical way of attaining personal wealth, according to a survey released Monday by the Financial Planning Association and the Consumer Federation of America. Among Americans with salaries of $25,000 or less, 38 percent believe the lottery is the way to go. - advertisement -

CFA Executive Director Stephen Brobeck says he's concerned.

"Nearly 16 percent said that winning the lottery was a very important wealth-building strategy for all Americans," he says. "It appears that these Americans both greatly overestimate their chances of hitting a lottery jackpot and greatly underestimate their ability to build six-figure wealth by patiently making regular savings contributions over time that benefit from interest compounding."

Most people know that the odds of winning the lottery are ridiculously remote -- approximately one in a gazillion (technically speaking, they're only hypergeometrically remote, according to the Minnesota State Lottery's explanation of the math).

Those who do win the lottery do not always achieve lasting financial security, as Bankrate's article, "Unlucky lottery winners who lost their money," reveals.

Unnecessarily negative attitudes

Let's face it: Expecting to get rich by winning the lottery is just not realistic. Sure, I play once a week, too. One can hope and dream, right? But somehow I doubt that the fates will intervene and provide me with retirement security. So -- who better to provide it than myself?

Brobeck says Americans are pessimistic about their ability to accumulate wealth. "This pessimism is usually not warranted. According to our survey, only about one-quarter of Americans, and little more than one-third of young adults, think they will accumulate as much as $200,000 at some point in their life."

Yet financial planning experts have a much more optimistic outlook, believing that about 80 percent of young Americans could save up at least $250,000 over a 30-year period, and half could amass $1 million -- with no help from winning lotto tickets.

How? By making monthly contributions to a retirement plan throughout their careers.

What's your net worth?

As a first step, Americans need to know what they're worth. I'm not talking about your intrinsic value, because we all have inestimable worth in that sense, right? Rather, how much wealth do you have, or, what's your net worth? Only about half of Americans know what components make up net worth, and less than half know what their own net worth is, says the survey.

Your net worth is a simple calculation of assets minus liabilities. Assets would include checking and savings account balances, money market accounts and cash value of insurance; the current market value of real estate you own; plus investment assets, including money in IRAs, 401(k) accounts and mutual funds in taxable accounts. Liability is a fancy word for debt, represented by outstanding credit card and auto loan balances, as well as mortgage and home equity loans.

You can probably do a quick calculation in your head, but if you want to do it right, you should check your bank and brokerage statements and create a personal balance sheet with precise numerical values at least once a year, preferably on the same date. This net-worth statement enables you to track your financial progress from one year to the next.

Other handy tools

Our net worth as a financial snapshot is useful. If it increases every year, that's good. If it doesn't, it's bad. But what does it mean relative to achieving specific financial goals? Is the debt that we're carrying too high? How much debt is too much? Have we accumulated enough savings at this point in time to meet our future savings goals?

Whether we are on track to meeting our goals will depend a lot on the variables -- our ages, the number of years left before we need the money, the return on our investments, the rate at which we withdraw the money, the number of years we expect to live, etc.

The current issue of the Journal of Financial Planning features an article by attorney Charles J. Farrell, who came up with personal financial ratios. They provide concise benchmarks that consumers could use to see how they're doing financially at various stages in their lives.

The idea of using ratios to make evaluations is not new. Stock investors use guidelines such as stock price relative to earnings (P/E ratios) to determine if a stock is cheap or overvalued.

Personal finance ratios

Why not apply the same concept to individuals to determine how their personal finances are doing? The three ratios that Farrell devises are savings to income (S/I), debt to income (D/I) and savings rate to income (SR/I). His ratios correspond with benchmarks people should attempt to reach between ages 30 and 65.

The beauty of the system: The ratios can apply to everyone at all income levels, since an individual's own income is the denominator in all the calculations.

"The objective of the ratios is to help individuals move from a situation of having high debt and low savings at the beginning of their working careers, to one where they have high savings and no debt at the end of their working careers," he says.

The assumptions

Farrell makes certain assumptions: a 5 percent rate of return on investments, a 5 percent withdrawal rate for retirement savings beginning at age 65, and savings that will replace 60 percent of pre-retirement income (so that when added with Social Security, an 80 percent replacement rate is achieved). The savings rate is uniformly 12 percent beginning at age 30 until retirement age. (You may need to adjust that assumption to fit your own situation. For example, if you started saving for retirement at age 35 instead of 30, you'd need to increase your savings rate). The goal is to accumulate 12 times your pre-retirement salary by age 65.

If you're feeling a bit smug because your net worth is high, due largely to appreciation of your home's value, Farrell's calculations may serve to humble. He doesn't count home equity as part of savings because people need someplace to live. Unless you plan to downsize, it shouldn't be factored in.

At age 30, the savings-to-income ratio is 0.1 (10 percent), the debt-to-income ratio is 1.70 or 1.7 times income level. At age 50, the savings-to-income ratio is 4.5 and the debt-to-income ratio is 0.75.

So, how do we interpret the ratios for the 50-year-old? Assuming an income of $100,000 (to make the calculations more transparent), boomers at this age level should have savings of four and a half times income, or $450,000. Total debt should represent no more than 75 percent of income, or $75,000, including mortgage, credit cards, car loans, etc.

Don't be discouraged

Remember, these are benchmarks toward which we should strive. Consider them tools to increase your awareness of your financial standing with respect to your goals.

Use them to realign your priorities. For example, if you are in the market for a new car, maybe you should decide against the $40,000 sport utility vehicle with leather seats, and instead opt for a smaller, more economical $25,000 model. Think you need a bigger home? Maybe you don't. Maybe instead you should pay off the home you have now and defer extra money into your retirement account.

What troubles me is that nearly 20 percent of the CFA/FPA survey respondents have saved less than $10,000 toward retirement -- and more than half of them are age 45 and older.

As my yoga instructor recently said to our class, "You've got to start from where you are ... because you have no other choice."

So yeah, it's not only possible, it's downright feasible to save up hundreds of thousands of dollars for retirement. Make your own fortune by steadily contributing to your retirement plan. And do let go of all expectations of getting wealthy by winning the lottery.

[DHK]

Well, when Chase DOES win the lottery:

Sudden Money: Managing a Financial Windfall

[DocDon]

First, winning a large drawing will increase your personal wealth. There's no two ways around that no matter what spin she tries to put on it. I have $10K in the bank, I win $325M, my personal wealth increased.

Second, who said anything about anyone spending their entire net worth on lottery tickets? A dollar or two a week for just a chance to win? STFU.

This is the best one:

Yet financial planning experts have a much more optimistic outlook, believing that about 80 percent of young Americans could save up at least $250,000 over a 30-year period, and half could amass $1 million -- with no help from winning lotto tickets.

How? By making monthly contributions to a retirement plan throughout their careers.

What's $1million going to be 30 years from now, "experts"? You can't retire on $1million today.

Not to mention, we all know plenty of people who now have NO retirement because they contributed to retirement plans throughout their career...

So when you dig through the article, you find:

1) Barbara Whelehan has a degree in English and Journalism. As the senior editor of Mutual Funds Magazine from '95 to '02, she "interviewed hundreds of fund managers and industry analysts as well as dozens of top-level executives at mutual fund firms across the country". In other words, she sat and listen to what the industry wanted to let her hear.

2) The Financial Planning Association is the membership organization for the financial planning community - like the ACA is to the collection industry. The FPA's primary aim is to be the community that fosters the value of financial planning and advances the financial planning profession. No, no bias there.

3) The Consumer Federation of America is an advocacy, research, education, and service organization. "As an advocacy group, it works to advance pro-consumer policy on a variety of issues before Congress, the White House, federal and state regulatory agencies, state legislatures, and the courts. As a research organization, CFA investigates consumer issues, behavior, and attitudes using surveys, polling, focus groups, and literatures reviews. "

Save money? People can barely keep their heads above water as it is? What the F surprises the CFA about this? Are they living in the same country as the rest of us?

Anyone notice when people "in the know" start pulling their money out of the market, within days commercials are run almost non-stop showing the CEO's of these investment houses reminding Americans that investing for the long-haul is still the most proven and financially sound method?

Do you think they really give a crud about you and are helping you through the tough times out of the kindness of their hearts? They were saving their own butts. I know people that listened to that, and I know people that didn't. The ones that did are staring at the remains of their portfolios. Years of hard work are GONE. The others pulled their money, bought a house when the rates fell, fixed it, flipped it, and put the money back in the market when the housing market began to stagnate.

The key here is to find the source of the information, why they have an interest in getting that word out, and taking responsibility for your money instead of relying on others as in this "leave everything up to us". Protect your money with your life, because that's what it is.

[LNY]

If I won the lottery, I just wouldn't have these problems. I would buy a small 2BR house, give some to my family, give a big chunk to charity and sock the rest away. No cars, trips, furs, jewels, plasma TVs... nothing. I might go as far as an iPod, but that's it. I just don't have big material desires.

I'm a casino's worst nightmare. I'm the one who might lose fifty bucks, but the second I win it back, I'm cashing out and walking out. I'm not the type to put it back on the table. Money's never come easy in my life... when I get some, I hang on to it.

Not that I'd win, because I don't play (I won $40 on a scratch-off once and felt rich). But if I did win, it wouldn't be a problem "managing" it.

[DocDon]

That's what most responsible people would do.

People who have won the big lotteries in the past and lost it all (we've all heard the stories) ended up that way because they had no respect for money even before they won.

Money will make you or destroy you - that demands respect.

[LNY]

I saw a documentary on that once. I was so offended by the piggish, self-aggrandizing waste--solid gold pianos, useless trinkets, mansions, etc.--that I didn't last 15 minutes. And they were all so PROUD, showing off how they wasted millions of dollars. "Look at me, look at me!" I was spitting with rage and changed the channel.

With all the good you could do in this world by sharing your wealth, it's a crime against humanity to waste it like that.

OK, rant over.

[DocDon]

But it catches up with them in the long run through a strange twist of fate, karma, whatever you want to call it. That's why not many people care when they hear they lost it all.

If you use (abuse) money to buy material items to fill this void of self-worth (ie: the "look at me! look at me!" syndrome) , you're going to lose....

[humdinger]

LNY

You are the Casino's worst nightmare! I work in a Casino as a dealer, 99% of the time no matter how much the player is up he gives it all back to the casino and more.

I had a young man buy in for about $100.00 on a blackjack table, I had him up to $14,000.00, I could tell this kid had never seen that much money in one place in his life, he gave it ALL back plus another $200.00. I can almost see the beast looming over their shoulder saying, "You can get even more".

[ghacorp]

humdinger,

You are correct about those casinos! I am not a casino gambler, but not long ago I accompanied a friend to the Trop in Atlantic City who is quite good at Blackjack. He starts with a few hundred dollars then usually after an hour or so, he's up a few thousand. At that point, I usually show up to persuade him to cash out before he loses it all back as has been the case in the past. The time I persuaded him to fold the tent after a big gain, the casino floor manager mysteriously appeared offering me buffet and show tickets to get the hell out of dodge long enough for the casino to win it all back from the guy. I graciously accepted the tickets then got the friend to cash-out with his windfall. The Pit Boss mumbled to me to enjoy the comp, but in future refrain from disturbing patrons at the tables. The nature of the business is to get the patrons as alcohol-impaired as possible by showering them with free drinks; and it works!

[LNY]

Haha. Humdinger, that story makes me cry. I would have been out of there so fast with that money, and never looked back.

Even though I'm not a gambler at all, a few years ago I decided to try one of those online blackjack games for money (just to see if they were legit). I decided to risk twenty bucks to find out.

I played a few hands and was down to my last couple of bucks, then I won it all back. As soon as I did, something popped up saying I'd earned a $50 bonus that was being credited to my account.

Of course they were counting on the fact that I'd turn around and plunk down all that money and keep gambling. I'm sure most people do. Not me. I went straight to "cash out" and put that fifty bucks right into my Paypal account. Never went back.

Yes, I am indeed a casino's worst nightmare.

[tycin1]

I play the lottery only when the pot gets really large. I figure, what's a $1 when there is a chance to win $55M even though the odds are 1 to several million!

I once heard about a guy that won the lottery and blew the money within a year. He sqaundered it on strippers and partying!

I'll bet that if you did win the lottery, you would have people coming out of the woodwork trying to get some of it! There would be friends and relatives that you never knew you had knocking on your door!

[nevermore]

But it catches up with them in the long run through a strange twist of fate, karma, whatever you want to call it. That's why not many people care when they hear they lost it all.

If you use (abuse) money to buy material items to fill this void of self-worth (ie: the "look at me! look at me!" syndrome) , you're going to lose....

Hmmm, where is Xan anyway?

[Ravenous Wolf]

The Pit Boss mumbled to me to enjoy the comp, but in future refrain from disturbing patrons at the tables. The nature of the business is to get the patrons as alcohol-impaired as possible by showering them with free drinks; and it works!

That is so crazy...

It would be one thing for the Pit Boss to say that if you were talking to total strangers... But talking to your own buddy... I wonder if they would do that to spouses...

[miracle]

But it catches up with them in the long run through a strange twist of fate, karma, whatever you want to call it. That's why not many people care when they hear they lost it all.

If you use (abuse) money to buy material items to fill this void of self-worth (ie: the "look at me! look at me!" syndrome) , you're going to lose....

Hmmm, where is Xan anyway?

bad, bad, bad. LOL!