Time Is on ERISA's Side - A Lesson from AGT about TVM

One of the things that can be hard to convey is the power of the time value of money (TVM) and its role in the World of ERISA. A partner of mine, when I explained to him years ago that eventually service providers would get fully taxed on their deferred comp., exclaimed "Oh, so it's just timing!" Yeah - timing that results in a multi-trillion dollar tax subsidy without a penny of cash outlay; timing that's the reason I have a career, or even a job.

(Disclaimer: I know that the relatively recent emergence of the Roth (good naming trick, Sen. Roth; good to be King) is highly significant and involves actual tax-exemption not tax-deferral. We'll ignore that development for present purposes.)

Indeed, we live in a world where employers have to match 401(k) contributions to get people to contribute. But even the tax-deferral without more should be a sufficient carrot, were it truly understood. Unfortunately, for people that value (or need) current income, they can't see what they're passing up by not taking full advantage of their deferral opportunities. Some even pass up the opportunity when there IS a match.

In order to convey the power and significance of TVM I like to go through a simplified example involving a single relatively short-term traditional 401(k) deferral. I'd like to think that's effective, but it is admittedly a bit dry. Well, now, a la the lottery scenario, where the numbers are dramatically (and if you ask me dishonestly) inflated by adding up annuity payments to be made in the far-distant future, we now have press on what America's Got Talent does. 

If you read the story linked here, you'll see that the wonderful and amazing Richard Goodall won't get anywhere near his supposed $1MM prize (other than by waiting for multiple decades). No, in order to get his supposed $1MM he has to take a current payment of (drum roll) $300,000. Now that's not, as Jackie Gleason might've said, a mere bag of shells, but it ain't no $1MM either. AGT makes untold amounts of money - and the producers can't see clear to communicating honestly about their top prize? Incredible.

Anyway, the main point here in ERISALand is to use the foregoing as a way of trying to add understandable color to the notion that "it's just timing" really misses the gist of about what the American retirement system really is. With apologies to Cyndi Lauper: Timing Changes Everything.

Congrats, Richard (and Angela)! I look forward to seeing you on tour with Journey and in other money-making (not to mention indescribably fun) activities that make the above TVM analysis essentially into an essentially irrelevant rounding error for you. Onwards! . . .