Inflation and real returns
Last updated: 2026-08-14
Invest $100,000 at 7% for 30 years and it grows to about $761,000. If inflation averages 3% over the same period, that balance buys what roughly $313,000 buys today.
Both figures are accurate. They answer different questions, and mixing them up is how long-range plans quietly fail.
Nominal, real, and the shortcut that misleads
People usually subtract: 7% minus 3% is 4%. The correct relationship divides, because both compound:
At 7% and 3% that gives 3.88%, not 4%. The gap looks trivial and is not: over 30 years, 3.88% turns $100,000 into about $313,000 while 4% gives about $324,000. An $11,000 difference from a rounding shortcut.
Why the nominal figure feels better than it is
$761,000 sounds like a comfortable retirement. In thirty years, at 3% inflation, it has the purchasing power of $313,000 — which is a different conversation entirely.
The error compounds with the horizon. Over ten years inflation erodes about a quarter of purchasing power at 3%. Over thirty it erodes nearly 60%. The longer the plan, the more misleading the nominal number becomes, and retirement plans are the longest most people make.
Inflate the target too, or deflate the balance
There are two consistent ways to handle this, and one common mistake.
Either express everything in today's money — use a real return and a target in today's dollars — or express everything in future money, using a nominal return and a target you have inflated forward. Both work.
The mistake is mixing them: projecting a nominal balance and comparing it against a target expressed in today's spending. That comparison always looks comfortable and is always wrong.
The assumption is not a forecast
Nobody knows what inflation will average over thirty years. Recent decades have included long stretches near 2% and short stretches far above it, and a plan built on a single assumed rate inherits all of that uncertainty.
Test a range rather than a point. If the plan survives at 4% inflation as well as 2%, it is robust. If it only works at the low end, the number to change is the plan, not the assumption.
See both numbers
The investment return calculator shows the ending value in both nominal terms and today's dollars. The retirement calculator applies the same treatment to a long-range income target.
Related reading: compound interest explained and retirement savings target.
What inflation does to a plan
Inflation is applied to the whole balance every year, so it compounds against you exactly as returns compound for you. Small differences in the assumed rate become large differences over a planning horizon.
| Inflation | After 10 years | After 20 years | After 30 years |
|---|---|---|---|
| 2% | $82,035 | $67,297 | $55,207 |
| 3% | $74,409 | $55,368 | $41,199 |
| 4% | $67,556 | $45,639 | $30,832 |
| 6% | $55,839 | $31,180 | $17,411 |
At six per cent inflation, a pot loses more than eighty per cent of its purchasing power over thirty years. This is why a retirement target expressed in today’s money needs a real return assumption rather than a nominal one.
Common questions
What is a real return?
The return after inflation. A seven per cent nominal return with three per cent inflation is roughly a four per cent real return, which is the figure that reflects what your money can actually buy.
Does inflation affect debt the same way?
It works in a borrower's favour on fixed-rate debt, because the payments are fixed in nominal terms and inflation erodes their real value over time.
Should I plan in real or nominal terms?
Pick one and stay consistent. Real terms are usually easier because the target stays in today's money. Mixing them is the most common planning error.
What inflation rate should I assume?
Test a range. Recent decades have included long stretches near two per cent and short stretches far above it, and a plan built on a single assumed rate inherits all of that uncertainty.
Related reading
The rest of this series, and the calculators that let you run the idea on your own numbers.
More investing and retirement guides
Try it with your figures
See also all guides, every calculator, and the calculation methodology behind these estimates.