Really am confused - Inflation, real rate, nominal etc - How to keep track against target?

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confused1
Posts: 56
Joined: Mon Jul 27, 2015 12:03 am

Really am confused - Inflation, real rate, nominal etc - How to keep track against target?

Post by confused1 »

All

I am finally living up-to my user name and completely confused :-)

We have a great spreadsheet that keeps track of our retirement investments, which we update every 6 months (have done so for a few years now).
We also have projected out 15 years (when we want to retire) and assumed 3% YoY growth including inflation
ie
100k this year
Will grow by x% but be devalued by y% - AND x-y = 3%
So next year worth $103k (in todays $$)

So everything is cool so far, or is it?
The $103k next year is not the actual amount we will have in the account - It will be something like $105k

I probably have this completely wrong but how do people track progress over time against their overall goals taking into account inflation?

Thanks
MrJedi
Posts: 433
Joined: Wed May 06, 2020 11:42 am

Re: Really am confused - Inflation, real rate, nominal etc - How to keep track against target?

Post by MrJedi »

I prefer to work in present day dollars and assume 3-4% real returns of my portfolio to get an idea of what different savings rates gets me to my goals (25-30x annual expenses). Everything clicks in my head better when I use present day value.

Each year I have a new estimate on what my annual expenses look like so I update and continue to use present day dollars with each update.
Topic Author
confused1
Posts: 56
Joined: Mon Jul 27, 2015 12:03 am

Re: Really am confused - Inflation, real rate, nominal etc - How to keep track against target?

Post by confused1 »

MrJedi wrote: Sun May 31, 2020 6:28 pm I prefer to work in present day dollars and assume 3-4% real returns of my portfolio to get an idea of what different savings rates gets me to my goals (25-30x annual expenses). Everything clicks in my head better when I use present day value.

Each year I have a new estimate on what my annual expenses look like so I update and continue to use present day dollars with each update.
MrJedi

Thanks, that really makes sense to me and allows us to tweak expected annual expenses in line with actual rate of inflation (or not) we are experiencing.

Confused (now slightly less)
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