Who Wants to Be a Millionaire?

Next time you are at the casino on some random Tuesday afternoon take a break from watching dealing procedures, multipliers, bubbles, and meters and look at the patrons.  Maybe tourist casinos in Las Vegas are different, but in the Midwest the majority of the people are older with failing vision, a fair number of them are pushing around a walker, and maybe even a person or two in a wheel chair…  It’s not unusual to see an oxygen tank.  I wonder how many of them are wearing diapers.  That last part in not important.

Why do I mention this? 

Your vision and mobility will get worse as you age too.  I am in my mid-forties now and I can feel a little something in my knee when it is going to rain.  I also have trouble keeping my prescription glasses up to perfect 20/20…  To make things worse, I have a family history of dementia, so I just might lose my mind at some point.  F-Me.  Aging is hell!  

-          I can’t hole card if I can’t see. 

-          I can’t beat someone to a machine if I can’t fast walk. 

-          I can’t analyze or count anything if I can’t think.

But I have a plan…  It’s called saving and investing.  

I know that sounds boring, but remember gambling and investing are just different shades of grey to an advantage player.  Both have positive expected returns and risks associated with the activity.  Investing is no different than tying up your money in a futures bet in the sports book, you are betting on competition.  I’m no investing expert, but I know enough to be dangerous.  I don’t plan on covering all investment options here, but there is plenty of good information available on the internet and you can self-research should my model be of interest.  If you want me to write more on any given option, I’ve probably thought about it and done at least some research. Drop me a note if you like.  I just don’t want to turn this into an investing blog, but damn…  This is a concept people, and APs in particular, need to understand.  Check your social security statement…  I’ll bet if AP is your full time gig, it looks scary.

Before I get into any models, I did mention in my opportunity cost article the assumption that you are making more money than you need to cover basic expenses.  Also, in my article on why I prefer cash back over travel rewards, I showed a simple model on the future value of those rewards.  The model I’m about to build here combines those two concepts.

Let’s make some assumptions to get started.

-          How much you will make as an AP can vary quite a bit based on how you run, how many hours you put in, what you are playing, how many opportunities you have, and how good you are at what you are doing.  I am going to pick a number out of the blue.  $35,000 a year. 

-          Good APs are a frugal bunch.  Of the $673.07 you have coming in a week, you are going to figure out how to put back $40 a week.  That right at 6% of your income.

-          You are a 25 years old.

Year 1 looks like this:

To make it grow, we need a few more assumptions.

-          You will be able to get a 7% a year return on investment on your balance.  An S&P 500 mutual fund would be expected to meet this return requirement and it’s 1) easy and 2) cheap.

-          You will be able to keep you income growing at 2.6% a year (equivalent to the inflation rate) every year.  You’d better be able to do this, or else you will feel a little poorer every year.

-          You will continue to put 6% of that income back for the next 10 years.

Here is what the account looks like when you are 35.

I know, you’re not impressed.  Stick with me for a bit... 

Here are a few more assumptions.

-          After hanging out in a casino full time (or doing whatever you do to make your money) for 11 years, you learn some new tricks and your income jumps by 10% in year 12.

-          You sustain that income for the next 10 years while continuing to grow it at 2.6% a year to keep up with inflation.

-          You decide you can save 2% more to make you total put back 8% of your income instead of 6%.  You still feel 8% richer because of your new trick that you learned that boosted your income by 10%.

Here is what the next 10 years look like:

In the next 10 years, we are going to do the exact same thing we did in the last 10 years.

-          Learn a new trick to boost income by 10%.

-          Save 2% more.

-          Keep up with inflation.

The only thing I’m doing different this time is that at the end of the period, you will be 55 years old.  At this point, I’m assuming you are sick of learning new tricks and are just coasting until 67.  I only stopped at 67 because that is considered full retirement age by the social security administration.

This is where it gets fun.

I just made you a millionaire.  You’re welcome!

If you like seeing the bottom line first:

-          Ticket in = $272,469. 

-          Ticket out = $1,013,024

-          Profit = $740,555

You can check my math, but I am putting this machine at 271.8%…. No heat, and I can get as much down as I can. 

I want to play that game!

Whether that is enough money or not is another question.  To help you figure that out, and to adjust accordingly, I posted some links on my useful links page:

-          With the FIRE calculator you can model how long this money will last.  It expresses success as a probability, and I like that. It lets me make one more bet.

-          As morbid as it is, you will need to know when you will die to use this calculator.  I put a longevity tool in my useful links section to help you with that.