When your golden years depend on Lady Luck

More people roll the dice, miss out on the sure thing that is compound interest

Your Money

July 10, 2005|By Janet Kidd Stewart

At the height of the 1999 stock market frenzy, when betting on initial offerings of Internet companies with no profits seemed a sure thing, plenty of people still put their money on another roll of the dice.

A survey by the Consumer Federation of America found that 27 percent of respondents said their best chance of accumulating a half-million dollars or more during their lifetimes was a lottery or sweepstakes win.

Fast forward to 2005, when market expectations are far humbler. The worldwide gaming industry has soared: Two-thirds of adult Americans in a Gallup poll this year said they had gambled in the previous 12 months, and U.S. lottery players spent $49 billion in 2004.

Experts say that's money that could be invested more wisely.

"People don't understand the power of compounding interest over time," said Mark Supic, spokesman for Primerica, the financial services firm that performed the survey with the consumer group. "We did the survey to show people you don't have to put in $500 a month. Start with $50 - anything."

"Some people get this feeling that putting $5 or $10 a week away is never going to cut it, so they've got to hit the lottery or a poker table," said Chris Cooper, a Toledo, Ohio, financial planner and accountant. "Another thing I'm seeing among elderly people without spouses is an attitude that they can just run up [gambling] debts and they'll die before they have to pay."

Despite the astronomical odds of winning, about half of all adult Americans play state lotteries, according to another Gallup poll released last year. Players reported they spend an average of $19 a month, while the lowest-income group - those earning $20,000 or less - spent the highest monthly average, at $46.

But those estimates may be low. Based on sales data from the North American Association of State and Provincial Lotteries, Americans spend $183 - or $15 a month - on a per-capita basis. That suggests average spending by those who play lotteries would be substantially higher.

Financial planners often hear about the perceived pointlessness of slow savings directly from clients, who like to gamble instead.

Cooper sees rising gambling losses on client tax returns, as poker and online gaming become more socially acceptable with young and old alike.

Recovering gambling addict Scott Damiani of suburban Chicago knows the effects firsthand. He lost his retirement savings, his home and his career as a service station owner to the addiction in his late 50s. Today, at 64, he is executive director of the Outreach Foundation for Problem and Compulsive Gamblers and has slowly started to rebuild his finances.

The allure of poker and online gaming is particularly devastating to the young, he said, while casinos eat up the elderly's retirement savings.

"You can't escape it today," he said. "This is the first generation growing up with legalized gambling everywhere."

It can't help but affect younger people's outlook about money and savings, he said, feeding a get-rich-quick mentality that takes away from the ability to see how consistently socking away a little bit will pay off in the long run.

And then there is Jean Scott, confounding all the sober warnings about the havoc gambling can wreak on personal finances.

The 66-year-old retired English teacher from Indianapolis studied Las Vegas like a textbook, learning how to count cards for blackjack and where to go for all the best complimentary food and hotel stays.

She now owns a condo in Vegas, but still receives plenty of hotel comps for visiting friends and relatives and other comps for everything from gas to groceries. She claims to have almost $1 million in the bank, not from huge gambling wins but from little wins over time and from never having to spend much on living expenses.

Asked about her investing strategies for her winnings, Scott has an answer that chills financial planners and gambling counselors alike: "I don't do nearly as well at investing as gambling."

Janet Kidd Stewart is a Your Money columnist.

Losses from gambling not always deductible

Confessing your gambling losses to a spouse may be difficult, but telling the government about the wins can be even tougher.

State tax laws on gambling winnings vary, and confusion abounds, tax experts say.

John Roth, now an analyst with tax information publisher CCH Inc., was working a few years ago for a national tax preparer when an Illinois client who was a gambler came in to have her annual return prepared. "She had basically been playing the same $2,000 over and over. So on paper she had won about $100,000, but was down about $100 with all the losses," he said.

Because Illinois doesn't allow deductions for losses, she owed nearly $6,000 in taxes on the winnings, Roth said.

"She was furious," he said. "A lot of recreational gamblers know you can deduct losses from wins on the federal side, but no one thinks about the state laws."

- Janet Kidd Stewart

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