How many times have you thought ‘If only I could just win the lottery…’ probably lots right? Me too. Today we’re going to visit the world of wishful thinking and talk about how much money you would actually need to win to significantly change your lifestyle.
A million bucks sounds like a lot of money (and it is) but it’s no longer the kind of money that’s going to let you quit your job and live the high-life. If you win $1,000,000 and invest the whole lot, you should be able to get about $50,000 of income without touching your principal (based on a 5% rate of return). That’s a decent amount of money to earn by not really doing anything, but unless you’re super thrifty, you’ll have to keep your day job. To put that in perspective, the median household income in Canada (based on 2013 data) was $76,550. That extra $50k each year will give you some extra spending money, but I can’t see it really changing your lifestyle.
If we bump up those winnings to $5 million that’s going to get you an extra $250,000 each year based on those same assumptions. Now we’re talking, that’s almost an extra $21,000 each MONTH. That’s the kind of money that will let you splurge on some pretty fancy vacations, but it’s also the kind of money that can get people in trouble if they’re not careful. Think about it, if you win $5 million and then spend $1 million on a brand new house, $100,000 on a couple of new cars, give some money away to all those long lost relatives that come crawling out of the woodwork, decorate that new house, go on some first class vacations, etc. that $5 million is going to diminish very fast. Then you won’t be earning nearly the $250,000 per year you were expecting. If you end up spending half your earnings right off the bat, you will only (not exactly the right word) have $2.5 million left to invest. That will still give you $125,000 per year of income (based on that same 5%), which is certainly comfortable but lower than what many lotto winners will expect.
I’m sure you’ve all heard the stories of people who win a big jackpot and end up spending it all and ending up broke. It always sounds so shocking and that there’s NO WAY you could go through money that fast but it really is a thing. It’s the same idea as when you get a raise. If you don’t adjust your savings rate right away you will find you just end up spending more and then wonder where all the money went. You get a false sense of security when that lotto cheque hits your bank account and won’t think about purchases the way you used to.
Another scary thing (scarier actually), is how many people are actually banking on winning the lottery instead of planning for retirement. According to a study done by BMO in 2013, 34% of Canadians are ‘relying on winning the lottery to fund their retirement’. Yup, 34%…that’s 1 out of every 3 people!!! Does anyone actually know the odds of winning the lottery? Sorry to burst your bubble but the odds of winning the Lotto Max are 1 in 28.6 million, and the odds for Lotto 649 are 1 in 14 million. The population of Canada is about 35.16 million people, so if we just take the 34% who are counting on the lottery that would leave us with about 11.95 million. Based on those odds, not a single person in that group is going to win the lottery. How’s that retirement planning looking now? Yikes.
Sure it’s fun to dream about hitting the jackpot, never having to work another day in your life and going on endless exotic vacations but those daydreams need to remain just that. You should never assume you are going to win even a small jackpot, the odds are seriously against you. Take the time to save and plan while you’re young and you can reap the rewards after retirement…no lottery necessary. Building good money habits early will also mean that if you do come into a lotto win, an inheritance, etc., you’ll be better at handling it and won’t blow it all on a race car.