Money...and time question!!

[Anonymous]

I have a question about the "time difference of money" - I don't know what to call it.

For example let's say that I have a co-worker that is 11 years younger than me, she is 29 and I am 40. She tells me that she is making $75K. I am thinking to myself that is very good because when I was her age I only made $50K and I am only now, at 40, making $75K. So we are making the same salary. Who is better off or is it basically the same? Since she is 11 years younger is her salary worth more in the sense that it has a longer time to compound (we are both putting retirement savings of 10% of salary aside). Or is it "even" because of inflation i.e. I will be retiring 11 years before her so my retirement savings will not need to be as high as hers will. This means that my 55 year old co-worker who has the same job as me should also be earning around $75K if we are on par? This is hypothetical, nothing to do with all the variables that determine salaries!

Another example would be the thread about the retirement article (that was posted today I think), where a poster said that her in-laws retired with $500K and it was a sad situation. However wouldn't them retiring on $500K probably 10 years ago be just as "wealthy" as those of us retiring with say $2.5M in 20 years? $2.5M being quite a lofty goal for most of us.

[Anonymous]

The answer will depend on if the rate of return on the money exceeds the inflation rate or not.

[Anonymous]

Anonymous wrote:The answer will depend on if the rate of return on the money exceeds the inflation rate or not.

If rate of return and inflation are both 3% then neither older or younger employee is better off than the other with their $75K salary?

[Anonymous]

I'm not sure I understand the question, but I'll try:

At 3 percent inflation, in 11 years $50,000 would be equivalent to $67,196. So the 29 year old is doing better - i.e. $75k is more than $67k. And since you are both earning $75k in the same year, you both have the same income. You are equal.

I don't really understand what "on par" means in this context. Someone who is older and earning the same amount has the same salary as you.

For what it's worth, $500k 11 years ago would be worth $671,960 (just add a zero to the above) given a 3 percent rate of return.

FYI, it would take about 56 years for $500k to grow to $2.5 million at 3 percent (no withdrawals, all interest is reinvested).

Does this answer your question at all?

[Anonymous]

check out this article,

http://en.wikipedia.org/wiki/Time_value_of_money

and learn to do this in Excel. (follow the "calculations" section in the article.) It's pretty clear that 50k 10 years ago is still less than 75k today, but if you ever have a question about it, check in Excel. (use the functions: PV, FV, RATE, NPER, and PMT)

On the other hand, you may want to stop comparing to others all together for the most part, because it does you no good. You can be an excellent work and do a great job and still not be paid well or as much as a corporate lawyer or surgeon. So much depends on your field, your company, your negotiations, etc. etc.