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

See all articles by Sherman D. Hanna

Sherman D. Hanna

Ohio State University (OSU)

Kyoung Tae Kim

University of Alabama

Date Written: September 25, 2016

Abstract

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

Hanna, Sherman D. and Kim, Kyoung Tae, Treatment of Inflation in Retirement Planning Calculations: An Improved Method (September 25, 2016). 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... Available at SSRN: https://ssrn.com/abstract=2843166

Sherman D. Hanna (Contact Author)

Ohio State University (OSU) ( email )

1787 Neil Avenue
Campbell 265D
Columbus, OH 43210
United States
614-292-4584 (Phone)

Kyoung Tae Kim

University of Alabama ( email )

312 Adams Hall
Tuscaloosa, AL 35487-0001
United States

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