We’ve lost our sense of timing. Not in the genetic sense; we still follow the rhythms of our daily lives. Those patterns are intact. The loss of timing we are experiencing relates to the time value of money. According the economic question, posed in a number of different ways depending on how you might search for the term, asks the reader to answer: would you take X-number of dollars today or wait for a period of time to receive the same amount?
Of course we’re smart enough to know that this money is needed now, not later. That all sorts of things begin to work away at the future value of that amount not the least of which is inflation. Inflation refers to the worth of that dollar and how much it might buy. Yet that isn’t the question that crosses our minds as our instincts kick in. It should be: what you would do with the amount now? And this is where our sense of timing as it relates to when the time value of money begins to falter.
The reason anyone would ask such a question becomes illustrative in the follow up to that query. It suggests that you know what that dollar amount can do if you use it properly. But we have been improper of late, seeing the value of every dollar in present terms rather than in the future.
Three things come to mind in response to this “impropriety”: You have constructed your day-to-day to spend every dollar that you have been paid for your work. Two: faced with a windfall, which would be in many instances, not that much over what you take home each paycheck, you’ll utilize it for the present. And three: faced with any budgetary bump in the road, whatever money you (may) have already accumulated in a retirement account becomes a consideration.
We have lost our sense of what the time value of money question was supposed to answer: what time can do to money. The examples will suggest that if you invest the money, the interest returned will answer the question in the simplest manner: compounding (any principal multiplied by the rate of interest paid equation) works to increase the value of the money over time.
Of late though I can’t help but feel as though we’ve lost the final piece of this economic puzzle. There are too few of us who embrace time as wholeheartedly as we should, investing for the long-term and doing so at every opportunity.
Now I mentioned budgets. Living within your means requires living below your means. Income is not supposed to meet expenditures head-on. If they do, you have missed the point. Your income should be divided into two distinct directions: one to survive on and the other to survive the future. The ability to even think in terms of future time is what the time value of money folks assume you know. You might admit you know this and regret not having done something about this “future” with the money in hand now.
So the question is why: Why do you know better and act in your own worst interest, defying what many economists assume is the most obvious path? Not all of us of course fail to invest in our futures. Half of us do and to further divide that down, the group who does doesn’t do enough separates the doers by half again. So some of us, actually a small portion of us, do see the distance and plan for it, scrimping and saving and investing, adjusting lifestyles now for lifestyles in the future, accounting for the taxes and the inflation and the upkeep of houses and health.
The question time value of money scientists should ask is why the message hasn’t sunk in to everyone. Perhaps it is the inability to actually see in the future, to envision what we are now in a place with so many unknowns. The simplest thing to do to overcome this inability is imagine that “now” on half of what you are earning.
You may argue that you will have a lower cost of living in retirement. You’ll suggest that the house will be paid for, the kids will be grown and gone and the only consideration you might have is reserving court time or greens fees. But close-to-retirement workers (Boomers) have suggested that this is not true. Statistics which admittedly can be adjusted to suit the argument, point to a problem with that thinking. The assumption in this plan points to your home as a line item asset.
Unfortunately this ignores two basic items: homes will not go the distance of time without maintenance and two the misunderstood place time holds in the minds of the lender. A lot of people simply suggest they will downsize and they might be able to take the equity in one property and roll it into another. What they aren’t realizing is they may need to roll all of it because they might not qualify for a mortgage.
Lenders have retirement age rules you may not be aware of. At age 60, a lender might not want to write you a mortgage – at least not in the traditional sense. The economic reality of a depressed housing market aside, they may not want to gamble on your life expectancy and if they do, forget the low advertised rates. You will be old(er) and from a actuarial stand point, not worth the risk. Have you consider this outcome? Many of us don’t. You can get a mortgage. It just won’t be the same type of document someone in their mid-thirties might get.
So the time value of your home works against your retirement plan if you are only making your payments. Your budget should reflect a mortgage payment schedule that shows your last house payment coordinating with the exact moment you retire. A firmer grasp on the whole time value concept would be making an effort to pre-pay your mortgage and do so in advance of your last day on the job. Imagine the last five years of your working career with the ability to redirect the former mortgage payment to your retirement accounts.
The fact that you aren’t investing enough plays a role in your ability to embrace the time value of money. I suggested that you envision living in retirement on half of what you are making now. This would, albeit roughly, match what a contribution level to a 401(k) of 10% would net. If you make a ten percent contribution in other words, you can rest assured (and I’m assuming low returns, stable inflation, etc.) that your retirement income will be half of what you were earning on a 10% contribution over 30 years.
Perhaps suggesting we have lost our sense of timing is too harsh. Perhaps I should have suggested we’ve misplaced the concept. That would more correctly suggest that it is something that can be found. Time can be on your side or it work against you. It has no agenda and yet, if you fail to make it part of your retirement agenda, you might be left wondering where the time went.
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