This online calculator will calculate the retirement savings needed in order to withdraw your desired monthly income for the duration of your life expectancy -- with and without accounting for inflation.
While I agree that ignoring the effects of inflation in financial forecasting will likely result in a failure to achieve expectations, I also believe that building inflation into financial forecasting tools tends to discourage saving and encourage spending.
When people see the difference inflation can make in their future financial condition, I'm willing to bet that many of them get so discouraged with all added sacrifices they will need to make in order to achieve their future goals, they simply decide to spend their money now -- while it's still worth something -- rather than saving it for the future when it will be worth much less.
Yes, the effects of inflation are discouraging. However, in financial forecasting it's always best to estimate income low and expenses high. Because even more discouraging than seeing the effects inflation has on future savings, is to arrive at your future with no savings at all.
My suggestion is this. Be sure to include inflation in your forecasts, but at the same time recognize that as inflation drives up the costs of goods and services, it also tends to put upward pressure on wages. So while your savings may be losing buying power each year, chances are good that your wages will also increase, which in turn means you should be able to increase the amount you are adding to your savings. If you want to hit the moon, shoot for the stars.
With that, let's use the following planning tool to calculate retirement savings needed by the time you retire in order to meet your monthly income goal.
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Annual return on investments (ROI): This is percentage by which you expect your investments to grow -- which is influenced by the frequency that the interest is compounded. The tool on this page bases its projections on monthly compounding. Each month the decimal equivalent of the annual percentage rate is divided by 12 to find the monthly rate. If the annual rate is 12%, or .12, the monthly rate would be 1%, or .01. The month-end investment balance is then multiplied by the monthly rate to arrive at the interest earned for the month. The interest earned is then added to the balance. Finally, the withdrawal is subtracted from the balance to arrive at next month's beginning balance. This same process if repeated for every month of the projection, summarized by year.
Inflation: Basically, inflation is the rise in the price of goods and services over time. The inflation rate is an attempt to quantify inflation, and is based on the rise of the consumer price index. Theoretically, if the inflation rate is estimated to be 4%, $1 will only be worth 96¢s; a year from now. Or to put in another way, a product selling for $1 now will likely sell for $1.04 a year from now. Therefore, to make a more realistic retirement plan, inflation should be considered -- though likely not at face value. After all, as prices rise, wages tend to also rise, thereby offsetting at least a portion of the effects of inflation.