Inflation is the reason a future expense and a pile of cash are not the numbers they look like today. Prices compound. A 3 percent rate for 20 years does not add 60 percent. It lifts prices by more than that, because each year’s increase applies to the new price, not the original one.
Two questions, one formula
Future cost grows an amount by inflation. Use it when you want to know what an expense will cost later: a year of college, a retirement budget, a car. Buying power shrinks an amount. Use it when you want to know what money you hold today will purchase after prices rise.
The rule of 72 is a shortcut shown beside the result. Divide 72 by the inflation rate and you get a rough count of the years prices take to double. The chart uses the compound formula, which is the number to put in a plan. The shortcut is for checking your intuition.
Pick a rate for the expense, not for the headline
Around 2 to 3 percent is a common long-run planning range for general prices in the United States. College and health care have often run hotter. A one-year spike is a poor 30-year assumption unless you have a reason to think it persists.
This tool does not pay you a return. Cash loses buying power. Money that has to sit for decades needs a return that can clear inflation, which is what the investment and retirement calculators are for. Use this page to move a price level. Use those pages to see whether savings can keep up.
A plan that ignores inflation gets quieter every year
A retirement income that never rises buys less every year. The drawdown calculator raises spending for that reason. A college target set in today’s dollars will be short if you save exactly that target and costs rise.
The rate is an assumption you choose, applied steadily. Actual inflation jumps around. The value of the page is seeing how sensitive a long plan is to a rate that sounds small.
How to use the inflation calculator
Future cost grows the amount by inflation. Buying power shrinks it. They are the same math in opposite directions. The rule of 72, shown beside the result, estimates how many years prices take to double. Divide 72 by the inflation rate. The chart uses the compound formula, which is more precise than that shortcut.
- Choose future cost if you want to know what something will cost later.
- Choose buying power if you want to know what money you hold today will purchase later.
- Enter the amount, an inflation rate, and the years.
- Use the multiple as a check. At 3% for 20 years, prices rise by more than one and a half times.
How the math works
Compound inflation
A 3% rate does not add 3% of the original amount every year. It adds 3% of the newest price. That is why 3% for 20 years lifts a price by about 81%, not 60%.
Two questions
Future cost answers “what will this expense be?” Buying power answers “what will this savings be worth?” Retirement targets and college costs need the first. A pile of cash that is not invested needs the second.
A planning rate, not a forecast
Long-run consumer inflation in the United States has often been discussed around 2% to 3%. Some costs, including college and health care, have run hotter. Change the rate to match the expense you are actually planning.
$100,000 and 3% inflation for 20 years
The default question is future cost.
Something that costs $100,000 today costs about $181,000 in 20 years. The same $100,000 of cash would buy about $55,000 of today’s goods. The price level is about 1.81 times today’s prices. The rule of 72 says prices double in about 24 years at 3%.
Terms worth knowing
- Inflation
- The rise in prices over time, which reduces what a dollar buys.
- Buying power
- The amount of today’s goods that a future or current sum can purchase.
- Rule of 72
- A shortcut: 72 divided by the annual rate approximates the years required to double.
- Real dollars
- An amount with inflation removed, so it can be compared with today’s prices.
What to do with the number
Use a higher rate for college and medical costs than for a general household budget.
Cash loses buying power. Money that has to sit for decades needs a return that can clear inflation.
A retirement income that never rises will buy less every year. The drawdown calculator raises spending for that reason.
Do not use a scary one-year inflation spike as a 30-year assumption without a reason.
Questions people ask
What this leaves out
Inflation compounds once a year at a constant rate.
The rule of 72 is displayed as a shortcut and is not the chart.
No investment return is applied.
The rate is an assumption you choose, not a forecast.
These figures are estimates to help you understand the tradeoff. They are not tax, legal, insurance, or investment advice. A fiduciary can look at the same numbers in the context of the rest of your plan.