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As we're all aware, one of the major components in all the 'retirement funds needed' calculators is the average inflation rate. I'm interested in what range most folks use. I'm cross-posting this same poll to other boards and I'd like to see if the ranges vary by board, so if you post to other boards, please answer it on only one. :-)

What range does the inflation rate you use for your estimates fall in?

These calculators also require an estimate of the rate of return for various invesments or have built into them some rate of return. I think you need to couple the rate of return on investments with the inflation rate. I focus on a real rate of return (i.e., after inflation) rather than both inflation and the inflated rate of return in my spreadsheet calculations. This simplifies everything since I can reason about things in current real dollar terms. A dollar today is a dollar thirty years from now. If you think inflation is 3% and returns will be 8% for your investment then just use real returns of 5%. If your rent is $1000 today there is no need to inflate it 3% per year and complicate your thinking. (The spreadsheet will handle it better than your brain.)

Another technique that I use is to set up multiple scenarios for various inputs. For example, use three rates of inflation ranging from mild to average to high. Do the same with other inputs. Mix and match to see how the results change. This gives you some intuition for the relative importance of things. You will find, for instance, that investment costs add up over 30 or 40 years.

Keep in mind that these simple straight line retirement calculators are not very useful for getting at the risks or even the details of planning for retirement. They provide a ball park estimate at best. Life is much too volatile for most of these calculators.

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