I’ve been volunteering as a math tutor most of my life. While we all in the financial services industry support and encourage programs for more financial literacy, there is more to it than that. Before we can assert widespread financial literacy, we need to ensure that we first have widespread mathematical literacy — or numeracy.

I first became familiar with the concept of numeracy years ago when I read Innumeracy – Mathematical Illiteracy and its Consequences by John Allen Paulos. In this book, Paulos points out that while illiteracy is a source of embarrassment for people,” innumeracy” is often a source of pride, as you hear people brag that they don’t get along with math or can’t balance their checkbook. Innumeracy doesn’t carry the same stigma as illiteracy. But it should.

Also see: "6 best practices to implement auto escalation in retirement plans."

Paulos suggests that it’s dangerous because innumeracy causes failure to understand risks, an acceptance of pseudoscience and misinformed government policies. We can see this becoming more and more pervasive in our society as political debates boil down to beliefs versus facts, and politicians spout expressions like “millionaires and billionaires” as though there is any similarity between the two (hint: there’s not).

The lottery strategy

From a retirement standpoint, I am very troubled by periodic surveys that show a significant number of people believe the lottery is their best strategy for accumulating a substantial nest egg. A 2006 study done for the Consumer Federation of America, for instance, showed 21% of the population (that’s one in five people) thought playing the lottery was their most practical strategy for accumulating several hundred thousand dollars. A similar 1999 survey showed that 40% of Americans with incomes between $25,000 and $35,000 thought the lottery would give them their retirement nest egg.

This isn’t just simple financial illiteracy, but too often a basic lack of understanding of the odds published by the lottery.

For example, the odds of winning the Powerball are one in 292 million. While I think everyone understands that is a big number, I don’t think people understand that if you bought a ticket for every drawing, twice a week for an average adult lifetime of 60 years, you would have about a 50:50 chance of winning the Powerball over the course of 32,000 lifetimes. Put another way, playing for about 2.6 million years would give you a about a 50:50 shot of winning. That’s an awfully long time considering humanity is only about 200,000 years old. The lottery, therefore, cannot be a retirement plan, despite the belief by too large a percentage of the population that it can be.

Also see: "Most non-profits don't consult a financial professional for 403(b) advice."

So, how do you maximize the probability of saving for a secure retirement from a retirement plan design perspective?

According to a recent study by the Employee Benefit Research Institute, a retirement plan with automatic enrollment and an auto-escalation feature results in a 94% probability of attaining at least 60% income replacement in retirement for those in the lowest income quartile, and an 88% probability of the same income replacement for those in the top income quartile. (The probability assumes total retirement income will also be complimented by income coming from Social Security, Individual needs to be eligible to participate in the retirement plan for at least 30 years.)

Still, those are pretty good odds.

Friedman is the tax-exempt national practice leader with the Principal Financial Group, an investment management and retirement leader. A noted expert on 403(b) plan design, he has been consulting with tax-exempt organizations for more than 20 years and has been in the retirement plan business since 1986. A version of this blog originally ran on The Principal blog. Followhim on Twitter @1AaronFriedman1.

Insurance products and plan administrative services are provided by Principal Life Insurance Company. Securities are offered through Princor Financial Services Corporation, 1-800-547-7754, Member SIPC and/or independent broker dealers.  Securities sold by a Princor Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group (The Principal), Des Moines, IA 50392.

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