Inflation-Adjusted Yield

Under the assumption of continuously compounded real investment returns, this Demonstration illustrates how, in the presence of inflation, one's investment life planning turns on the net of nominal investment yield and inflation. Required annual income increases over time if lifestyle is to remain constant, since inflation affects nominal dollars. Yield on present retirement funds has the effect of (a) extending capital and (b) offsetting inflation. Retirement planning often crucially hinges on the net difference between yield and inflation, which can be netted against one another if compounding is continuous.

Retirement planning is also done in the context of mortality. As background, the average life expectancy is shown. This average is only a benchmark and necessarily means that some will live much longer (and others shorter). The "years retired" variable can—and most people hope it does—extend well beyond life expectancy. So we see that the question is compound: How long will one's money last and how long will one physically last? Estimating the joint probability that investors will not outlive resources is an actuarial question not contemplated by this Demonstration. The point here is that retirement planning requires considering a number of interacting factors, including estimating future inflation.

Note that all outcomes are expressed as present values. Thus, the last computation, present value of last retirement year income, can be misleading. For the default case one should recognize that the $54,881 is the present value of a number to be realized in 30 years. Hence $54,881 where the inflation rate is a nominal required income in 30 years of $178,000.