By Ann Coleman (TMF AnnC)
March 24, 2000

Ever contemplate what you would do if you won the lottery? You don't have to answer out loud. Not every one wants to admit it, but I suspect nearly everyone not living in a kerosene-lamp cabin in Montana has lottery fantasies at least occasionally. I used to spend an unhealthy amount of time on them myself -- and I very rarely played the lottery. (Of course, there was always those publisher's sweepstakes. I do buy an occasional magazine.)

Now that I have become Foolish, I've given up Prize Patrol fantasies for something better -- the IRA "lottery." It's a much more satisfying fantasy because sooner or later it may really come true. And it has the added advantage of not involving my picture on national television.

One of the reasons I gave up lottery fantasies was that I found that most of them centered on ways to avoid publicly acknowledging that I had won. Note to self: If you are going to dream, don't dream about something that invokes anxiety. I also started limiting the amount I was winning in my fantasies because having too much money seemed to obligate me to a life devoted to giving it away. That's a noble endeavor, but I do have a few other ideas about how to spend my time. And what if my friends became jealous and didn't like me anymore? It finally occurred to me that I didn't really want to win a lottery and certainly not a big one -- I just wanted enough to retire early and live modestly well. A helipad in my backyard is just not that appealing.

Actually, the lottery fantasies were quite useful. I learned a lot about myself. Now I know what I really want, and, amazingly, it is within reach. Back 10 or 20 years ago when my IRA was kind of puny, I did the projections, but I didn't really believe them. I could see that the same rate of increase that added a few hundred dollars to my IRA each year would translate to tens and hundreds of thousands way down the road, but it was no more real to me than the idea of Ed McMahon on my doorstep.

For those of you just starting out, let me assure you that time is your greatest friend. Here's how it works, assuming you can average a 20% return on your investments (an ambitious plan, but in keeping with the Foolish Four's history and very much in keeping with a mixture of Foolish Four and growth stocks). The table below shows a $2000 IRA growing at a 20% annual rate with an additional $2000 added each year:

Start        $2,000.00
Year 1       $4,400.00 
Year 2       $7,280.00 
Year 3      $10,736.00 
Year 4      $14,883.20 
Year 5      $19,859.84 
Year 6      $25,831.81 
Year 7      $32,998.17 
Year 8      $41,597.80 
Year 9      $51,917.36 
Year 10     $64,300.84 
Year 11     $79,161.00 
Year 12     $96,993.21 
Year 13    $118,391.85 
Year 14    $144,070.22 
Year 15    $174,884.26 
Year 16    $211,861.11 
Year 17    $256,233.33 
Year 18    $309,480.00 
Year 19    $373,376.00 
Year 20    $450,051.20 
Year 21    $542,061.44 
Year 22    $652,473.73 
Year 23    $784,968.47 
Year 24    $943,962.17 
Year 25  $1,134,754.60 
Year 26  $1,363,705.52 
Year 27  $1,638,446.62 
Year 28  $1,968,135.95 
Year 29  $2,363,763.14 
Year 30  $2,838,515.77

I haven't made it to the bottom of the table yet, but I'm far enough along to see that, yes, this compounding thing really does work. You can play some fun games with the table above. Find your portfolio value and then see how many years are left to your goal. Or double the initial amount and your annual contributions (possible for married couples in an IRA), and all the other numbers double. Suddenly, that goal is a whole lot closer.

Here's an interesting thing I noticed when playing with my spreadsheet. After 10 years of $2000 annual contributions and 20% growth, this account can stand on its own. If you stop making the annual contributions at that point, it has very little effect on your final total. In fact, it takes just one year longer to hit the first million dollar mark. Of course, that's because of the high growth rate I am using. Contributions become more significant when the growth rate is lower.

How achievable is this growth rate? I won't kid you. It's ambitious to expect to maintain that kind of growth over a long period of time. The Foolish Four strategy appears to have done it over the last 30 years, but it has averaged less than that over the last three years. Who knows what the future will bring?

So here's what I think is the worst case scenario: Market returns. If you don't think you can beat the market, join it, via an index fund. Over the last century (which included two world wars and a major depression, remember) stocks grew at an annual rate of 12%. Using that growth rate, it takes 39 years to hit that first million. (And, yes a million bucks in 40 years won't be worth the same as a million today. But it will still be a million bucks.)

With that as a worst case and a best case that is almost unlimited, I feel pretty good about the IRA lottery.

Happy weekend fantasies.

Fool on and prosper!