Inflation and Dollars

Every dollar figure in a plan is either in today’s dollars, which grow with inflation each year, or in nominal dollars, the literal amount paid in that year. Most inputs let you choose. This page says which is which, where the inflation rate comes from, and how it moves through the projection.

Inputs

Any sized amount, such as an expense, an income stream, a contribution, or a fixed withdrawal, is Inflation-Adjusted or a Fixed Amount. Inflation-adjusted means today’s dollars: the amount rises with inflation every year so its purchasing power holds. Fixed means nominal: the same dollar figure every year, which loses purchasing power. Either can carry a growth rate on top, so a salary can grow 2% a year above inflation.

A growth rate compounds from the year the item starts, so an income stream beginning ten years out opens at its stated amount in today’s dollars and only then starts earning its premium. Set Growth Starts to At plan start for an amount that drifts before it begins, such as a quoted premium or the price of a future purchase; the growth rate then compounds over the years before the item is active as well. The inflation adjustment always runs from the plan start either way — that is what today’s dollars means.

Some inputs are always today’s dollars: a Social Security benefit from a statement or an earnings estimate (a manual monthly amount is taken as nominal in the year it starts, then rises with inflation), a FIRE target, the legacy target, and the price of a future purchase or a future loan, which are inflated to the year they happen.

A withdrawal’s gain or loss limits can be inflation-adjusted. The dollar cap on a tax-targeted withdrawal follows the same rule as any other sized amount.

Where the inflation rate comes from

The catalog carries a historical inflation series alongside the fund histories (market data). On the expected-returns path, every year uses the long-run average inflation rate. You can override it in the same place you set asset return overrides.

In a Monte Carlo trial, inflation is sampled from the same historical years as the returns, so each trial carries its own inflation path, and a high-inflation trial erodes fixed-dollar income and pensions whose cost-of-living adjustment lags (Projections & Monte Carlo). The inflation override reaches the trials too, recentered the same way a return-rate override is (asset return overrides). The override sets the rate only. Inflation has no volatility setting, so its year-to-year swings always come from history. A historical replay uses the replayed years’ actual inflation and drops the override.

Formulas can read the year’s rate as inflation_rate and convert a today’s-dollar figure with FUTURE_DOLLARS (planner context).

What inflation runs through

• Tax brackets, the standard deduction, contribution limits, the Social Security wage base, and other indexed figures rise with inflation from their tax year.
• The variable spending budget is computed in that year’s dollars and restated each year.
• Social Security in payment rises each year by the prior year’s inflation, the same lag as SSA’s cost-of-living adjustment, and is never cut (Social Security).
• Pensions rise by each plan’s cost-of-living formula, which may lag inflation (pensions).
• Property values rise with inflation plus any appreciation you set (property).
• Real returns are nominal returns minus inflation. The return override editor shows both.

Reading results

Results open in Today’s Dollars. Switch to Future Dollars to see the nominal figures. A result stated in today’s dollars can be compared across years directly. A result in nominal dollars grows with inflation, so a flat real spending line rises on a nominal chart. When two numbers disagree, check which dollars each is in before comparing them.

Today’s dollars measure each figure against prices on the plan start date. Income, expenses, and taxes are indexed once a year at its start, so an inflation-adjusted amount reads back at the figure you entered in every year, however inflation varies. Balances are measured on December 31, so they also carry that year’s inflation: an account earning exactly the inflation rate holds its value, and cash earning nothing shrinks, from the first year on. In a plan that starts mid-year, the first year counts only the inflation after the start date.

If a fixed payment shrinks year after year, the view is restating it in today’s dollars. A mortgage payment, a Fixed Amount income, or a pension with no cost-of-living adjustment all decline in the default view. Switch to Future Dollars to see the constant figure.