Inflation is the quiet variable in every long-term money calculation. A plan that looks comfortable in today's dollars can fall short once decades of rising prices are factored in. This guide explains how inflation affects your numbers and a simple way to account for it.
How much inflation erodes purchasing power
At 3% annual inflation, prices roughly double in 24 years (72 ÷ 3, the Rule of 72). Put another way, a dollar today buys only about 48 cents' worth of goods after 25 years.
| Today's annual spending | Same lifestyle in 15 years | In 25 years |
|---|---|---|
| $40,000 | $62,319 | $83,751 |
| $60,000 | $93,478 | $125,627 |
| $80,000 | $124,637 | $167,502 |
Assumes 3% annual inflation. The Federal Reserve targets 2% inflation over time, but actual inflation varies widely by period.
To see how much prices have actually risen in the past, for example since the year you started working, try our Inflation Calculator, which uses official CPI data back to 1913.
Nominal vs. real returns
- Nominal return: the return you see on your statement.
- Real return: the nominal return minus inflation. It measures growth in purchasing power.
If your portfolio earns 7% and inflation runs 3%, your real return is roughly 4%. Your balance grows 7% a year, but what it can buy grows about 4%.
The simple fix: work in today's dollars
The easiest way to handle inflation in a calculator is to keep everything in today's dollars:
- Enter expenses and targets in today's dollars, meaning what things cost now.
- Use a real return assumption: expected return minus expected inflation. For example, 7% − 3% = 4%.
- Read the results as today's purchasing power.
This keeps the numbers intuitive. "$1 million in today's dollars" is easier to picture than a larger nominal figure 25 years from now. It's how we recommend using our Retirement Number and Compound Interest calculators for long horizons. See our methodology page.
Inflation in retirement itself
Inflation doesn't stop when you retire. Over a 30-year retirement, the cost of your lifestyle may double. Two things help:
- Social Security benefits are adjusted annually for inflation through cost-of-living adjustments (COLAs).
- Safe withdrawal rate research, like the 4% rule, already assumes your withdrawals rise with inflation each year. See how much you need to retire.
Many pensions and fixed annuities aren't inflation-adjusted, so their real value shrinks over time.
Tools that can help protect against inflation
- Stocks have historically outpaced inflation over long periods, though not in every period.
- Treasury Inflation-Protected Securities (TIPS) and I bonds are U.S. government securities whose value adjusts with inflation.
- Delaying Social Security increases an inflation-adjusted lifetime benefit.
Frequently asked questions
What inflation rate should I assume?
Many planners use 2.5%–3% for long-term planning. Using a slightly higher number than you expect builds in a margin of safety.
Do all expenses rise at the same rate?
No. Healthcare and housing have often risen faster than general inflation, while some goods have gotten cheaper. If healthcare is a large part of your retirement budget, consider a higher assumption for that portion.