trying to grok

THE SUCKER TAX

Neal Boortz was talking about the lottery earlier today as I drove home from the commissary, and I couldn't believe my ears. He said he had read a study a while back that said that 50% of respondants said they planned to use lottery winnings to retire. I've been searching and cannot find this study, but I did find this:

Twenty-one percent of those surveyed said a lottery would be the most practical strategy for accumulating several hundred thousand dollars, and that percentage was higher among lower-income people, with 38% of those who earn less than $25,000 pointing to the lottery as a solution.

Some 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," said Stephen Brobeck, executive director of CFA, in a telephone press conference.

Knock me over with a feather.

This ties in nicely with a blog post AirForceWife sent to me yesterday. FrugalDad wrote a blog post called Language of the Perpetual Poor, which contained this gem:

If you are ever around a gas station on Friday night you see them lined up at the counter forking over $20 of their hard-earned paycheck for their chance at financial glory. And just try telling them that $20 a week in a mutual fund averaging 8% growth for 30 years adds up to $130,000. Who can afford to invest in mutual funds?

So there you go, there's your six figures. Shoot, you'd be better off putting the money in a coffee can, as one commenter said she started doing instead of going on on the office pool.

In searching for these shocking lottery statistics, I also came across this anecdote to put it all in perspective:

"'Suppose you have one friend in Canada. If you put the names of everyone in Canada in a hat and draw one name at random, you are 2.5 times more likely to draw your friend's name than you are to win the Big Game,' according to Cal State-Hayward statistics professor Michael Orkin."

Heh.

A big problem is that people are so mathematically ignorant that they don't even understand these odds. Here's how bad it is:

The study also identified a strong relation between financial literacy and retirement planning. Persons who understood finances more were more likely to take charge and plan for their retirement. Financial literacy was judged on the basis of being able to answer simple financial questions including:

“If the chances of getting a disease are 10 per cent, how many people out of 1,000 would be expected to get the disease?” Answer: 100. (Percentage of people answering correctly: 84.)

“If 5 people all have the winning number in the lottery and the prize is $2 million, how much will each of them get?” Answer: $400,000. (Percentage of people answering correctly: 56.)

“Let’s say you have $200 in a savings account paying 10% per year interest. How much would you have in the account at the end of two years?” Answer: $242. (Percentage of people answering correctly: 18.)

This is just basic stuff, people. Yikes.

There are only two tricks to investing for long-term financial success: early and often. The lottery doesn't enter into it.

Posted by Sarah at April 25, 2008 12:03 PM | TrackBack