Nominal vs. Real Returns: Accounting for Inflation in Projections

A major oversight in long-term financial planning is confusing nominal portfolio value with real purchasing power. Inflation steadily reduces what a dollar can buy over time.

Real Rate of Return

To find your real rate of return, subtract the annual inflation rate from your nominal investment yield. If a portfolio earns 8% in a year with 3% inflation, its real growth in purchasing power is approximately 5%.

Strategic Adjustments

Because long-term costs naturally rise, financial plans should account for inflation by gradually increasing monthly contribution amounts over time to maintain overall wealth-building momentum.