Inflation and real return: understand the impact on savings
Capital can increase in monetary terms while losing purchasing power if its growth remains below inflation.
Nominal does not mean real
Nominal return measures the displayed change in capital. Real return accounts for price changes. For a simple estimate, inflation can be subtracted from nominal return, although the exact formula uses a ratio.
Project long-term goals
For a goal ten or twenty years away, expressing the target only in today’s money can underestimate the future need. Apply an inflation assumption to the project cost and compare scenarios.
Projections do not predict inflation. They only show how an assumption changes the roadmap.
Keep assumptions cautious
Compare a central scenario with a less favourable assumption. If your goal only works with a high return, strengthen the roadmap with more time or savings.
Frequently asked questions
How do you calculate real return?
The exact formula is (1 + nominal return) / (1 + inflation) - 1. Simple subtraction is only an approximation.
Why include inflation in a simulation?
Because the same amount will probably not buy the same goods or services several years from now.