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Although you can choose any rate of inflation and return, I prefer to use rates based on some actual historical numbers. The latest 'history' I have available for both S&P500 returns and inflation are for the period 1961-2006. I calculate the average annual inflation rate for that time period at 4.3%, and the average annual S&P500 return at 8.46%, for a net 'real' return of 4.17%. More conservative folks than I use 2%, and there are lots of folks who use more than 4.17% (i.e. 8%-3% = 5%). If that happens, I'll be thrilled, but I prefer a more conservative number. YMMV,

2old
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