Dubai: Winning a life-changing amount in the lottery, whether it's six figures or millions, is often dreamt of as a way to much-desired financial freedom. But would you retire early after you win the lottery? Every second lottery winner in the world decides against quitting the workforce, here’s why.
“People often envision retiring early after winning big in a lottery, but often times that may not be the case because to quit your job and retire immediately on lottery winnings, you basically want to replace all of the income that comes in,” said Andrea Barber, a Dubai-based financial planner.
“That means winning an amount of money that, when properly invested in a low-risk investment portfolio, will yield enough returns for annual withdrawals at least equal to your current annual salary — without exceeding 4 per cent of your winnings, a common financial planners’ rule.”
People often envision retiring early after winning big in a lottery, but often times that may not be the case
How big a lottery you need to win to retire early?
Barber was referring to using a well recommended formula to determine how big a lottery jackpot you need to quit and retire early: It’s known as the ‘4 per cent rule’, which says that in most cases you can safely withdraw 4 per cent a year from your retirement savings portfolio.
Wealth managers further note that by reversing the ‘4 per cent rule’, you can figure out how big your portfolio needs to be. Simply divide your annual spending by 0.04 (or multiple it by 25) to get your target. How much would it then fare in your financial position?
“It really boils down to, once you have enough money where you can withdraw 4 per cent, then you can walk away from the workforce. If you typically spend somewhere between Dh30,000 and Dh40,000 a year, you needed to get to Dh1 million (Dh40,000 / 0.04),” explained Barber.
Would you retire early after you win the lottery?
When UAE residents Hamid Ghadi, 48, Aditya Srivatsav, 34, were asked their thoughts on retiring after winning a Dh1 million lottery, Srivatsav said that he wouldn’t unless the amount is much higher, while Ghadi agreed that he would quit the workforce without a doubt.
“After taking into account my post-retirement investments and liabilities, I wouldn’t retire early even after winning such a lottery amount as I would be giving up another two decades of regular income,” said Srivatsav, an Indian expat working as a stock market analyst in Dubai since 2012.
However, for Saudi national Ghadi, who already has plans to retire from the workforce by age 55, winning Dh1 million would fast track his retirement plans. “If luck works in my favour and I win the lottery amount now, I can be comfortable to retire by the end of the year, as I’m currently debt-free.”
After taking into account my post-retirement investments and liabilities, I wouldn’t retire early even after winning such a lottery amount as I would be giving up another two decades of regular income
Not everybody retires rich if expenses are high
“Everybody who wins the lottery, isn’t walking away with millions like it is often portrayed. Many more people win smaller prizes and such winners might not be able to retire early,” said Ajaie Albert, Communications Director of US-based lottery technology company Lotto N Crowd.
“Regardless, it is still a life altering amount of money that can be used to pay off debt, establish emergency funds and reinvest in the community,” added Albert.
So now the question arises how much is enough to retire right away and live comfortably? As mentioned above, that depends a lot on your current living expenses and current financial position.
What’s enough to retire early, live comfortably?
Here’s another illustration to get a clearer idea of factoring expenses. Let’s say you’re approaching (or already in) your sixties, own a house on which you still owe about Dh75,000, have Dh30,000 in other debt (credit cards, loans, vehicles, etc.) and have about Dh120,000 in your retirement account.
For example, if your Dh1 million is invested somewhat conservatively and you earn only 4 per cent per year in interest, you’d have an annual amount of Dh37,680 to meet your ongoing expenses. If your savings earned 5 per cent per year, you’d live on the same Dh37,680 per year and let the remaining 1 per cent stay with your winnings to grow your savings and help against inflation.
If you use the traditional method of making your retirement savings last, you would live on 4 per cent of your retirement savings each year. Also, the ‘4 per cent rule’ tells you to increase that amount by enough to cover inflation each year after the first.
Everybody who wins the lottery, isn’t walking away with 100s of millions of dollars like how the news portrays it to be. While a $500,000 winner might not be able to retire early, it is still a life altering amount of money
Why many don’t retire after winning the lottery
Surveys have found that a majority of us wouldn't want to continue working even if we won the lottery. The majority of people surveyed said they would be “bored” if they didn’t work and that working gave them a “sense of purpose and accomplishment”.
US billionaire entrepreneur and television personality Mark Cuba advises, winning a lottery gives you financial security, but it won’t give you everything: “If you weren’t happy yesterday you won’t be happy tomorrow. It’s money. It’s not happiness.”
“Also, don’t deny the role debt can play on a person’s mind when they win a lottery. Given that debt only eats away at your savings or winnings, it’s natural for a winner to think that the more he or she earns an income, the sooner debt can be paid off and winnings utilised as a whole,” added Barber.