Treatment of Inflation in Retirement Planning Calculations: An Improved Method
Hanna, S. D., & Kim, K. T. (2017). Treatment of inflation in retirement planning calculations: An improved method. Journal of Financial Planning, 30 (1), 44-53..
32 Pages Posted: 26 Sep 2016 Last revised: 3 Jan 2017
Date Written: September 25, 2016
1. The typical treatment of inflation in retirement planning textbooks is too complex and is not reasonable in terms of the amount to contribute the first year being dependent on the inflation rate assumption.
2. Economists typically put all amounts and interest rates in inflation-adjusted terms, which is simpler and a more rational approach to long-term planning.
3. The typical financial planning approach requires an assumption about the future inflation rate, which is difficult to justify based on economic history in the United States and other countries.
4. Most people have difficulty in comprehending the meaning of future amounts in nominal terms, so doing all projections in inflation-adjusted terms can help clients better understand projections.
5. In calculating the capital needs for retirement, inflation-adjusted rates of return for each step should be chosen based appropriate portfolio choices for before and after retirement.
Keywords: retirement planning, inflation, investment returns
JEL Classification: D14, D91
Suggested Citation: Suggested Citation