Lotto Wins for Retirement?

Macleans has an article out this week that speaks about how lotteries are now the retirement plan of choice for 32% of Canadians between 45 and 64 years old.  This not only a surprisingly high percentage, but it almost matches the 34% who said they actually have retirement plans and investments to go with the plans.

The chances of winning Lotto Max are about 1 in 85 million, or about 0.0000012%.  Not great odds.  Yet, the closer people get to retirement, the more concerned they are that they haven't saved enough and are turning to lotteries as a hopeful "quick, cheap fix" to get the retirement savings they will need.

I'm not trying to condemn lotteries, but I want to emphasize that planning on winning the lottery to fund your retirement is not a plan at all.  It's a gamble with your retirement's financial security, and the odds are not in your favour.

What is the best way to retire financially secure?  Start early, create and periodically update a plan, invest regularly, diversify your investments to reduce risk, and live on less than you make.

When people don't feel financially secure, they start to do things that don't always make sense, reacting out of fear rather than following a logically laid out plan.  These over-reactions often fall into 2 categories:

1. Try to cut costs and reduce risk to zero - the problem with this is that reducing your investment risk to zero also means you are reducing your current and future income (low risk means low return), probably when you need greater growth most.  Controlling costs is always important, but going to an extreme can mean you lose out on investment opportunities or even cause yourself harm (canceling insurance, not repairing vehicles or equipment). 
2. Take much higher risks to try and get above average returns - the further away from retirement a person is, the more risk they can take on, as a loss can be regained over time before retirement.  Taking too much risk, however, means exposing yourself to potential losses on a larger portion of your total investments.  If you have more than 10 years before retirement higher risk can be rewarding enough to risk part of your portfolio, but the closer you are to retirement the less risk exposure you want for your savings.  You won't want to eliminate it entirely, as you will then run into the problem of over-reaction #1.

Over the past decade we have seen some excellent examples of the above over-reactions.  In the 2000's, Baby Boomers took on more and more risk with their investment portfolios, expecting an unrealistically high return every year, and being lucky enough to get it for several years, but then many lost over 20% of their investments in 2008.  Scared, they pulled much of their savings out of the riskier stocks and mutual funds and put it into high interest savings accounts.  No risk in savings accounts, but not much return either.

Now, after a couple of years of low returns, many Baby Boomers are scared that their savings won't be enough for retirement and are returning to the market.  This is not a bad thing, but more and more people who are less than 5 years away form retirement are looking for 10% returns again, and are exposing their investments to more risk than they probably should at this stage of life.  They are acting out of fear, not logic.

The realities around retirement are changing.  The Freedom 55 plan that was promoted through the 80's and 90's may now, realistically, be freedom 67. What used to be accepted as standard may not apply anymore.  The following are a few items from a recent Ipsos-Reid Survey as reported on the Globe and Mail website:

• Canadians in their thirties and forties expect to retire at age 67. However in the 60-to-65 age group, the expected retirement age rises to almost 72.
• Men expect to work almost two years longer until they retire (to almost age 69 for men compared with age 67 for women).
• The reasons for expecting to work past 65 vary by gender. More men than women say they will be working because they want to work, while women are more likely to think they will need to work.
• Canadians are shifting their priorities. Paying down personal loans, credit cards, and other debt has moved ahead of saving for housing or retirement and is now the number one financial priority.

It looks like retirement is probably going to be different than many were thinking 10 or 20 years ago.  Different doesn't mean bad, it means different.  Unless you win the big prize in the lottery.  And if you do win the big prize, stop by and I'll add $10 more to your winnings.  I think the odds are in my favour that I won't ever have to pay the $10.  Jerry