The formula
Value in today’s money = future amount ÷ (1 + inflation rate)years
“Nominal” means the number of dollars, rupees or euros. “Real” means what those amounts can buy, measured in today’s prices. If prices rise 3% a year, something that costs 100 today costs about 103 next year, so 103 next year has the same purchasing power as 100 now.
A worked example
Suppose a projection shows 100,000 in 20 years and you assume 3% inflation a year. In today’s money that is 100,000 ÷ 1.0320 = 100,000 ÷ 1.806 ≈ 55,368. The account balance would still say 100,000, but it would buy about what 55,368 buys today.
Reference table
| Inflation rate | In 10 years | In 20 years | In 30 years |
|---|---|---|---|
| 2% | 82,035 | 67,297 | 55,207 |
| 3% | 74,409 | 55,368 | 41,199 |
| 4% | 67,556 | 45,639 | 30,832 |
Applied to a goal: 1,000,000 in 30 years at 3% inflation is worth about 411,987 in today’s money. That is why the meaning of “millionaire” changes over time.
Real returns
You can also think in terms of a real return: roughly the nominal return minus inflation. A 6% return with 3% inflation is close to a 3% real return. The exact figure is (1.06 ÷ 1.03) − 1 ≈ 2.9%. Projecting with a real return gives results directly in today’s money; projecting with a nominal return and then dividing, as our calculator does, gives the same answer and shows both columns.
Which inflation rate to use
- Look at your country’s official consumer price index. In the United States, the Bureau of Labor Statistics publishes the CPI and an inflation calculator for past prices.
- Use a range rather than one number, for example 2%, 3% and 4%.
- Remember that your own costs may rise faster or slower than the average, for example rent, school fees or health care.
- Use the same currency for the inflation rate and the amounts.
Limits
Inflation is not steady. It can be high for a few years and low for others, and no one can predict it precisely. The formula uses one average rate, which is fine for planning but will not match any single year. For the full picture of how assumptions interact, see how to project your net worth.
Questions people ask
How long does it take for prices to double?
At 3% a year, about 23.4 years. The rule of 72 gives a quick estimate: 72 ÷ 3 = 24.
Do savings goals need adjusting for inflation?
For goals more than a few years away, yes. Raise the target by expected price growth, or plan in today’s money and increase deposits each year.
Sources
- U.S. Bureau of Labor Statistics, CPI inflation calculator: historical price changes using the CPI-U.
- U.S. Bureau of Labor Statistics, Consumer Price Index.
Educational information only. Inflation assumptions are illustrations, not forecasts.