How inflation compounds
Inflation compounds just like interest, only against you. Prices rising 3% a year don't go up 60% in 20 years. They go up about 81%.
Future cost = Amount × (1 + i)t · Buying power = Amount ÷ (1 + i)t
i is the yearly inflation rate and t the number of years. The Federal Reserve targets 2% inflation over the long run. The U.S. averaged a little over 3% a year across the last century.
Frequently asked questions
What inflation rate should I use?
2–3% is a common long-term planning figure. For a worst-case check, try 4% or higher.
How do I protect savings from inflation?
Money that earns more than inflation keeps its buying power. Long-term investments, I bonds and TIPS are common ways people try to keep pace.
Why does this matter for retirement?
An income that feels comfortable today buys noticeably less in 20 or 30 years. Enter your target income here to see the future-dollar equivalent.