Inflation

Inflation-Adjusted Retirement Planning

Inflation

The Real Rate of Interest

The "real" rate of interest was defined in 1933 by Irving Fischer in his book Inflation, as follows:

(1+i) = (1+r)(1+r)        where: r = the "real" rate of interest
                                                  r = the annual rate of inflation, and

                                                   i = the contract rate of interest

We can solve the above relation for the "real" rate, r, as follows:

(1+r) = .	(1+i)		or .
	(1+r)

r = .	(1+i)	- 1	Either form is equivalent, and are exact formulas.
	(1+r)

We can also express a simpler, approximate equation for the "real" rate of interest by multiplying out the first form and discarding the cross-product, rr, as follows:

1 + i = 1 + r + r + rr

Solving for r, and collecting terms yields:

r ≈ (i -r) It is important to remember that this last form is just approximate. It is also the most widely used.

The "real" rate of interest is an abstract construction. We call it "real," but we only know it by calculating it. It is important because in all your retirement planning, it requires the i > r for any real growth in your investments.

Historical US $ Inflation Rates	Current US $ Inflation Rates	Future US $ Inflation Rates
The US Consumer Price Index	Money as a Commodity (Supply versus Demand)	Adjusting Retirement Income for Inflation
The Real Rate of Interest	Countering Inflation	Constant Dollars