Extreme Time Value of Money: Late-stage Career Planning

A billion dollars in 30 years. Would you take it? I wouldn’t.

This is another of my “smash two ideas together” essays. In this case, the ideas are:

• The time value of money &
• Mortality

Heavy stuff, but there you have it. It’s a new year, time for big thoughts.

Time Value of Money

I turn 60 this year. I’ve recently noticed my career thinking diverging from that of my colleagues. Reflecting on the differences I’m led back to a theme of economics I learned early and have been teaching ever since: the time value of money.

I was dragged to the time value of money by the absurdity of software engineering dogma at the beginning of my career. The trend was to do more and more work now (spending money all the while) for (it was promised) greater and greater benefit later and later.

This didn’t make sense to me. Much of that up-front work turned out to be useless speculation. More fundamentally, this style contradicted a central tenet of economics — the time value of money.

A dollar today is better than a dollar tomorrow. It’s worth more. If I have a dollar today, I can invest it and make more by the time tomorrow comes around. I should prefer less than a dollar today to exactly a dollar tomorrow, less by a discount rate (which, spoiler alert, is hard to figure out and shouldn’t be modeled as a constant, but please keep reading).

If you accept this truth, then you do exactly the opposite of “spend more now to (maybe) make more later”. Those dollars you spend now are more expensive than the dollars you earn later.

Aligning with economics requires that you start earning sooner and defer spending as long as possible. This seems to contradict engineering purity — if I do a great job today then I’ll never have to invest in this code again. Sorry, that’s not how money works. Look at Extreme Programming and you’ll find a hundred ways to earn sooner and spend later.

(At this point I encourage you to do background work to gain intuition about the time value of money. Build a spreadsheet. Play with parameters. Let the difference between a dollar today and a dollar tomorrow soak into your bones. That’s what I did.)

Here are 2 more ways to think about the time value of money. First, the less time involved, the less it matters. This will be important as we talk about the effects of mortality.

The second, the discount rate profoundly affects the difference in value. Compare 5% with 10% with the current yield on 30-year Treasuries of 1.6%.

Discount Rate Isn’t Constant

Back to that billion dollars in 30 years. Why is that worthless to me? Is a billion dollars in 1000 years worth anything to you? No. You won’t be alive to benefit from it. 100 years? Same.

If you’re 20-something, a billion dollars in 30 years is awesome. You can do whatever for 30 years, secure in the knowledge that your financial options will explode at the end of that period. And you’re likely to be alive to experience it. For me, though, a billion dollars after either I’m too old to enjoy it or after I’m dead is worth nothing. I’d literally rather have one dollar in my hand today.

(All numbers taken from the morbidly fascinating https://flowingdata.com/2015/09/23/years-you-have-left-to-live-probably/).

One of the challenges working with the time value of money is determining the discount rate. My discount rate here in the last stage of my career is not constant. That’s what I was missing. My colleagues have a smooth discount rate over the 10–20 year time scales we are used to. I stop financially caring about the future before they do. Here are the life probabilities for a 30-year-old male.

As long as my young colleagues get paid off some time in the next 30 years they have a high probability (relative to me) to have a long time (relative to me) to enjoy their money.

My “discount rate” isn’t a single rate at all. Past a certain horizon, probably 30 years, it’s infinite. Before that it’s steep. I’m much more interested in money while I can enjoy spending it.

Time Value Arbitrage

If you actually offered me a billion dollar 30-year principle-only bond I wouldn’t just use it to light a bonfire. I’d go find a bank (or similar counter-party with a smooth discount rate) and offer it to them. They’d give me the $600M today minus whatever for their transaction costs and risk of non-payment. I’d have instant options for retirement. They’d have more money in the future. Everybody happy.

Which brings me back to my disconnect with my (younger) colleagues. Tech compensation is biased towards the long term:

• 4–5 year vesting schedules,
• Further delays before liquidity,
• The risk of equity value dropping to zero and thus the need for a portfolio of equity, further extending the timeframe for The Big Score.

4 years versus 8 years versus 12 years to liquidity is no big deal when you’re 30. For me, though, 4 years is a significant fraction of the time I have left to enjoy money.

I don’t have an answer to this mismatch. Much of the work I do creates value over decades. In the time I have left I have to both:

• Earn money so I have financial options &
• Enjoy the time.

Is there a way to sell long-term benefits for short-term revenue? Technology compensation is stacked against me. At the very least I’m glad I have a frame for understanding my frustration.

Epilog: Finance Matters

Finance profoundly affects our work and our lives as geeks. It needs to be normal to talk about it. (There are also some cool concepts to explore in there — ask me about options pricing algorithms some time). Talking about it is part of helping geeks feel safe in the world.

Finance profoundly affects the options we will have for the rest of our lives. Gaining financial literacy and then acting sensibly based on that knowledge is low-cost and low-risk. I hope that talking about how financial tradeoffs change as context changes will encourage you to learn, apply what you learn, and benefit thereby.