Time Discounting

The value of something promised in the future is less than the value of that same thing received today. This is the concept of time discounting. This concept is a corollary of compound interest which Albert Einstein called the 8th wonder of the world. $1,000 earning 5% compounded annually will grow to $131,501 in 100 years and $17,292,580 in 200 years. Now that is a legacy for your heirs! But you must deal with the “risk of ruin.” Not only can the sustainability of compound growth be interrupted by unforeseen events in those long time frames, but the principal itself can be lost. Understanding this “risk of ruin” may be the basis for our seemingly irrational loss aversion.