A recent study into the financial habits of those aged 55 and over in the UK by insurer SunLife revealed some interesting findings. For example, the study found that those in this age bracket think they need extra savings of £184,484 to live a comfortable lifestyle in retirement. The study also found that 30% would consider equity release if they needed a cash sum. Yet perhaps the most interesting – and slightly shocking – finding from SunLife’s study was that 76% of people in this age bracket are playing the National Lottery or investing in Premium Bonds. From a retirement saving perspective, that could be a huge mistake. Here’s why.
Put simply, investing in Premium Bonds is an extremely ineffective way of saving for the future. The reason I say this is that Premium Bonds pay no regular interest, meaning they won’t protect you from inflation. While they advertise an interest rate of 1.4%, this interest in only paid out to monthly prize winners and the odds of winning money are abysmal. Overall, the odds of winning a prize are 24,500 to 1, while the odds of winning a million are 36bn to 1. To quote the Money Advice Service: “Your chances of winning the top prize are very slim – most people will win smaller prizes or nothing at all.” Given these poor odds, putting money into Premium Bonds isn’t a smart strategy.
The National Lottery
Meanwhile, those playing the National Lottery are literally throwing money away. Sure, there’s a possibility of winning life-changing money through the lottery. Yet the odds of winning a major prize are very much stacked against you – according to the Lotto website, the chance of winning the National Lottery jackpot is 1 in 45,057,474 while the odds of getting five numbers plus the bonus ball are 1 in 7,509,579. You don’t need to be a maths genius to realise that these are extremely poor odds.
A better way to generate wealth
A much more effective way of building wealth, in my view, is to invest in the stock market. While stocks can be volatile in the short term (meaning it’s possible to lose money), history shows that they’re an excellent way of building wealth over the long term.
For example, according to the 2019 Barclays Gilt Equity study, UK stocks have generated a return of around 5% above inflation since 1899. More recently, the FTSE 100 index was able to deliver a return of 6.6% per year for the five years to the end of July, despite the pullbacks associated with the Brexit vote in 2016 and the US/China trade war last year. Had you invested in a global equity fund such as Fundsmith over the last five years, you could have nearly tripled your money.
When you consider figures like these, it becomes clear that stocks offer a vastly superior risk/reward proposition compared to Premium Bonds or the National Lottery, despite the fact that share prices can fluctuate in the short term.
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Edward Sheldon has a position in Fundsmith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.