Two ways to look at the same erosion
Inflation can be expressed from either direction, and both are useful. You can ask what a fixed sum of money will buy later, or you can ask what today's basket of goods will cost later. They are the same phenomenon inverted.
With the defaults above — $100,000 at 3% for 25 years — the money retains about $47,761 of today's purchasing power. Framed the other way, buying what $100,000 buys today would cost about $209,378 in future dollars.
Notice the two figures are not symmetrical. Losing 52% of purchasing power corresponds to prices slightly more than doubling. This trips people up constantly: a 50% price rise requires only a 33% loss in purchasing power to match it.
The rule of 70
A useful mental shortcut: divide 70 by the inflation rate to get the approximate number of years for prices to double. At 3%, that is roughly 23 years — the calculator's exact figure is 23.4.
At the Federal Reserve's 2% target, doubling takes about 35 years. At 7%, it takes ten. The same arithmetic works for compound growth of any kind, which is why the rule is worth memorising.
This is what makes moderate inflation so easy to underestimate. Three percent sounds negligible in any single year. Over a career it halves what your money is worth.
Why this matters most for retirement
Inflation is the single most underweighted risk in retirement planning, because it operates on the longest timescale. Someone retiring at 65 might need their money to last 30 years — long enough at 3% for prices to more than double.
A retirement income that felt comfortable at 65 can be materially inadequate at 85 without a single thing going wrong. This is precisely why the 4% withdrawal rule specifies adjusting withdrawals upward for inflation annually, and why holding a retirement portfolio entirely in cash or bonds carries its own serious risk.
It also explains why nominal projections mislead. A calculator promising $1,000,000 at retirement is quoting future dollars. At 3% over 30 years, that is worth about $412,000 in today's terms — still a meaningful sum, but less than half of what the headline implies.
What actually keeps pace
Historically, equities have been the most reliable long-run hedge, because companies raise prices along with everything else and earnings tend to grow with nominal GDP. This holds over decades, not years — stocks often fall during inflation spikes before recovering.
Treasury Inflation-Protected Securities adjust their principal with the Consumer Price Index directly, which makes them the most explicit hedge available, though with correspondingly modest real returns. I Bonds work similarly for smaller amounts.
Real estate and a fixed-rate mortgage combine two effects: property values broadly track inflation, and inflation erodes the real value of the debt you owe. Your payment stays fixed in nominal terms while wages and prices rise around it.
Cash is the clear loser. A savings account paying 2% during 3% inflation loses 1% of real value annually, however comfortable the growing nominal balance looks.
Frequently asked questions
- What inflation rate should I use?
- The long-run US average is roughly 3%, and the Federal Reserve targets 2%. Using 3% for long-range planning is reasonably conservative. Recent years have varied substantially in both directions, so treat any single year as a poor guide.
- Is this the same as the CPI?
- This calculator applies a constant rate you choose. Real inflation is measured by indices like the CPI and varies year to year. Your personal inflation rate also differs from the average depending on whether your spending is weighted toward housing, healthcare, or education, which have historically risen faster than the overall index.
- How do I adjust an investment return for inflation?
- Subtract inflation from your nominal return for a close approximation. A 7% return with 3% inflation is roughly a 4% real return. The precise formula is (1 + nominal) / (1 + inflation) − 1, which gives 3.88%.
- Does a salary raise below inflation mean a pay cut?
- In real terms, yes. A 2% raise during 3% inflation reduces your purchasing power by about 1%. This is why inflation figures feature so heavily in wage negotiations.