I'd like to know what my retirement's purchasing power is. I think the best way to do that is to adjust for inflation in reverse, maybe?

I know to calculate your future salary with inflation you can do Salary * (1+inflation%)^number of years. Meaning if my current salary is $100,000, and inflation is 3%, in ten years my salary should be $134,391 if I've kept up with inflation.

But I want to know something like, if I had $1 million 10 years from now, and inflation was 3%, what would that be like having today?

Can I do Retirement * (1 - inflation%) ^ number of years? That calculates to $737,424. But is that right?

  • 2
    Often it is simpler to calculate your expected retirement savings in present dollars. That way instead of knowing "I will have $1 million in 2025 dollars" and wondering "how much is that worth in 2015 dollars", you will just know how many 2015 dollars you will have in 2025. – BrenBarn May 26 '15 at 6:58

The correct calculation is actually Retirement / (1 + inflation%) ^ number of years.

Thinking back to your original calculation for calculating future values, you'd expect that you could get back to exactly the same number ($100,000) by applying your second formula to the result. Given that you multiplied by the effect of inflation to get from the present value to the future value, you should divide by the effect of inflation to get from the future value to the present value.

However, in practice for low values of inflation, 1/(1+inflation%) is quite close to the value of 1-inflation%, and so you'll get nearly the same answer. I get $744,093 for your example.

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