Key takeaways
- Inflation compounds in the direction you do not want, using the same arithmetic as your returns.
- US consumer prices have risen roughly 3 percent a year over the long run, which halves purchasing power about every twenty four years.
- A plan quoted in future dollars flatters itself. Quote it in today's dollars and it tells the truth.
- Subtracting inflation from your assumed return is the quickest way to see the real number.
Two compounding curves, opposite directions
Everyone understands that returns compound. Fewer people carry the second curve in their head. Prices compound too, and they never take a bad year off in your favor.
A 7 percent return against 3 percent inflation is not 7 percent of progress. It is closer to 4.
What the record shows
US consumer prices have risen at roughly 3 percent a year over the long run. Dimson, Marsh and Staunton put US inflation at 2.9 percent annually across the 125 years from 1900 to 2024. The series maintained at NYU Stern puts it near 3 percent since 1928.
At that pace, purchasing power halves about every twenty four years, which follows from the same rule of 72 that governs your returns.
Quote the plan in today's dollars
A projection that ends at $2 million in 2056 sounds like wealth. In today's purchasing power, at 3 percent, it is closer to $825,000.
Neither figure is wrong. One of them is comprehensible. Every projection here therefore carries an inflation adjusted twin, and the calculators plot both lines so the gap between them stays visible.
Working with real returns
The shortcut is to subtract inflation from your assumed return and work in real terms throughout. Assume 7 percent nominal and 3 percent inflation and you are planning at about 4 percent real. Balances then arrive already expressed in money you can reason about.
Sources
- Dimson, Marsh and Staunton, UBS Global Investment Returns Yearbook 2025, US inflation of 2.9 percent annually for 1900 to 2024.
- Aswath Damodaran, NYU Stern, historical series covering 1928 to 2025, inflation near 3 percent.
- Purchasing power figures above are computed at a flat 3 percent for clarity.
Open Forecast. Every projection there carries an inflation-adjusted twin so plans read in today’s money.
Open in Capital Allocation →