Let's say one starts with a portfolio balance of $1,000 and wants to contribute an additional $100/year. Future returns are assumed to be 5%/year. Future inflation is assumed to be 2%/year.

If he chooses to increase contributions each year for inflation, the FV math for 10 years, applying a real ROR of (1+5%)/(1+2%)-1 = 2.94%, yields $2,513.17 with contributions at the beginning of the year, $2,479.55 with contributions at the end of the year. So far so good.

But what if he chooses to NOT increase contributions each year for inflation?

  1. In that case, I think Year 1's real contribution is $100, Year 2 becomes $98.04 and so on. What FV formula do we use for this - and do we still apply the 2.94%?

  2. If he chooses to make those contributions at the end of the year, does Year 1's real contribution become $98.04, or do we "baseline" with $100 real in Year 1 no matter when it's made?

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