Lottery vs. Investment — Exactly How Bad Is It?

Bootstrapism

Watching a video debunking the lottery recently, I decided to quantify the financial impact of poor people playing the lottery against investing money. I find this kind of nagging about coffee, avocado toast or lottery tickets mostly bootstrapism, where financial gurus claim people wouldn’t be poor if only they made better decisions. Sure, it makes a difference, but how much EXACTLY?

Standard disclaimer: None of this is financial advice. Lottery tickets and investments are risky and can and will lose value. Your mileage may vary. This is an exercise to address average performance of two activities over decades to evaluate the impacts.

Methods

To explain why, I spread out the costs and gains from age 18 to age 89. I used $2 lottery tickets, purchased weekly 50 weeks a year, assuming people miss buying them while traveling, etc. So $100 a year in lottery tickets. I assumed any small winnings like $4 or whatever were wasted on either more lottery tickets or frivolous purchases at the lottery retailer.

For the investment I assumed a Roth IRA invested in Vanguard Total Market ETF (VTI) at $7 a trade. There is a low 0.03% expense ratio. I assumed 5% investment gains with a slowdown similar to the now closed original Vanguard total market fund and later Admiral Fund (8.87% annual return, decreased to 5.79% annual return). I picked a ROTH IRA because it is where after tax dollars used to buy lottery tickets would ordinarily be invested, and it has advantages for poor people in that the contributions (though not investment gains) can be easily withdrawn without serious tax penalties. Because it is a Roth, there are no taxes paid for retirement age withdrawals.

The first few years the money isn’t invested because there is typically a $500 minimum investment on a low fee Roth IRA. Once $500 is saved up, the money is put in a Roth IRA account. Not all of the money is invested. I assumed one $7 trade once a year of the $100 saved. I also input the 0.03% expense fee. Then I used an investment gain of 5%.

Important: This setup seems a reasonable best case to me for people in the bottom 25%, 10%, 1% income brackets. Better performance likely implies higher fees or more investment knowledge. A 1% or 2% fee would have severely reduced the already modest investment results and higher risk investments seems a bit like gambling for someone with so little assets. There are no guarantees and poor investors can easily lose money against their principle rather than make gains!

The Spreadsheet:

Here is the spreadsheet link.

The First Four Years: For the typical poor person, there would be many expenses which would threaten any savings: doctor co pays, car repairs, rent, etc. Now draining savings in these emergency situations would be preferable to not having the money, but remember financial scolds were saying this money was a ticket out of poverty. There is no evidence that poor people would go for four years without needing the $400 for necessities. This kind of marshmallow problem doesn’t make sense. Without your health, you can die or be unable to work. Without transportation you can’t get to work. $100 a year is barely a bus pass in most places. Again, the person who saved is better off than the person who did not, but for a person in the 25%, 10%, or 1% income percentiles going 4 years without needing this money makes the idea of investing instead of playing the lottery unrealistic. We are so far just talking about spending the money on something else, not investing it

The Next Twenty Years (Age 22 to 42): The next could of decades are slightly better as the poor person finally has enough money to open a Roth IRA account and invest. But even after 20 more years, 24 years total, we’ve got $4,603 dollars. And this amount assumes not only has this account NOT been drained for doctor co pays, car repairs or rent, but that is hasn’t paid for the birth of a child, a modest wedding, a replacement vehicle after 24 years, etc.

The Peak (Age 43 to 58): The first sign this strategy might accomplish anything long term is forty years into the process. As long as the poor person doesn’t need cash for 40 years, the investing your lottery spending will work out. This is basically inconceivable. If you never needed four thousand to twelve thousand dollars you wouldn’t be poor.

Retirement (Age 59 to 70): Retirement accounts like the Roth IRA aren’t fully accessible to age 59.5. And for a very important reason poor people should just take out the $13,074 at that point. The reason being poor people are usually dead before age 70, so holding out to age 69 isn’t a genius financial move. Not to mention the health problems are almost certainly piling up. At this point, it should be clear that a lifetime of holding back from buying lottery tickets is beneficial, but not sufficient to raise people out of poverty. But just to be charitable, lets assume this advice was for a person with a middle class lifespan.

The Middle Class (Age 72 to 89): For a middle class person, a lifetime of buying index ETFs instead of lottery tickets looks WAY better. Living 10, 15, to 20 more years helps a great deal as the power of compound interest is greatest in the later years. I should point out, that if a poor person were to live this long, again they should just cash out unless they were deliberately saving the money for their grandkids. And that is what middle class people, for whom the lottery scolding makes much more sense, would also likely be doing. Although to be honest $63,000 isn’t a lot of money for a middle class family to get from a 90 year old. Sure, it buys a car or two or pays for a year and a half of college. A down payment on a house. But it isn’t winning the lottery.

And I think this shows that Bootstrapism is designed to appeal to middle class people who definitely could turn $100 a year into $63,000 eventually, but is not actually useful advice for poor people. Yes, spending the money on useful things is better than lottery tickets, but the myth that poor people can just stop buying lottery tickets and escape poverty is not realistic.

Writing

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