Inflation changes what a future balance can buy. A retirement forecast should let you compare future money with today’s spending and should use consistent return assumptions. Nominal money is the amount paid; real money expresses its purchasing power after inflation.
A large future number can buy less than it seems
At a constant 2% annual inflation rate, something costing €2,000 a month today would cost about €2,972 in 20 years. Conversely, €1 million received in 30 years would have purchasing power of about €552,071 today. These are mathematical illustrations of a constant rate, not inflation forecasts.
The
European Central Bank explains inflation
as a broad increase in prices that reduces purchasing power. A household’s actual experience can differ from an average price index because households buy different things.
Keep nominal and real returns separate
A nominal return describes investment growth before adjusting for inflation. A real return describes growth in purchasing power. The relationship is: real return = (1 + nominal return) ÷ (1 + inflation) − 1.
At 7% nominal return and 2% inflation, that calculation is 1.07 ÷ 1.02 − 1, or about 4.90% real return before tax. Subtracting the two percentages gives a rough approximation of 5%, but the ratio is the precise relationship for those constant rates.
A model that already inflates future expenses expects nominal return assumptions unless it says otherwise. Entering a real return there can count inflation’s effect twice. The opposite mismatch can make a plan too optimistic.
What Zenarios assumes for new plans
New Zenarios plans default to 2% inflation and a 7% annual investment return for a shares-oriented mix, before inflation and after fees. The balanced choice uses 5%; the cautious choice uses 3%. Savings interest defaults to 1.5%, and home price growth to 2%.
Those are editable planning assumptions, not expected-return promises. Saved plans keep the rates they were created with. The methodology page lists the defaults and explains the calculation scope.
Use today’s prices to compare lifestyles
Zenarios can display future amounts at today’s prices. That makes the purchasing power of a retirement balance easier to compare with current spending. Switching the display changes how an amount is expressed; it does not improve the underlying plan.
A nominal view remains useful for the amounts you may actually pay or receive. For example, compare the scheduled loan payment with cash income in that month. Use the real view when asking whether future spending supports a lifestyle similar to today’s.
Do not let one inflation rate stand in for every cost
Rent, wages, healthcare, taxes and a fixed loan payment need not move together. Check how the planner treats each item. A contractual payment may stay level while everyday costs rise; a pension may follow different rules from pay.
For long plans, test higher costs and lower investment returns separately. Then test them together. A household may cope with either change alone but struggle when both happen. Zenarios’ inflation shock and market futures explore uncertainty beyond the smooth default path.
A short consistency check
Before comparing retirement targets, confirm whether spending is in today’s money, whether investment returns are nominal, how pension income grows and how long the forecast runs. Keep the basis the same across scenarios.
This is especially important for Coast FIRE shortcuts, which often discount a target using a real return, and for FIRE numbers based on annual spending. A clearly labeled smaller number is more useful than a larger one whose purchasing power is unclear.
Common questions
What is the difference between nominal and real returns?
A nominal return measures money growth before adjusting for inflation. A real return measures purchasing-power growth: (1 + nominal return) / (1 + inflation) − 1. At 7% nominal return and 2% inflation, the real return is about 4.90%, before tax.
What investment return does Zenarios assume?
New Zenarios plans default to 7% a year for a shares-oriented mix, before inflation and after fees. Balanced and cautious choices use 5% and 3%. Inflation defaults to 2%. All are editable assumptions, and saved plans keep their existing rates.
Explore Zenarios
See the Zenarios financial planning features, explore life scenarios and financial decisions, or read about how Zenarios calculates your forecast and how your financial data stays private.
Try Zenarios in your browserWritten by the maker of Zenarios, a software engineer. These guides explain planning concepts and the product; they are not a personalized financial recommendation. Illustrative calculations are not results from your plan.