To learn more about how we determine safe inflation and return rates, see Inflation and Rate of Return Data (includes spreadsheet data).
Taxes, Social Security benefits, the real (inflation-adjusted) cost of your mortgage payments and many other variables depend on future inflation. Hence, under MaxiFi's hood, the inflation rate you set plays a key role in calculating your household's sustainable living standard. That said, MaxiFi reports all its results in today's (inflation-adjusted) dollars. The inflation rate is used throughout all of our calculations to express all amounts in today's dollars.
We urge you to adopt our default values for the rate of return and inflation. Entries that produce much higher or much lower safe real returns are not, in our view, appropriately cautious and may lead you to spend, save and insure more or less than you should. For more information about why such cautious return assumptions are most appropriate for your base plan, please read this document that explains the difference between deterministic and stochastic planning models.
If you are concerned about current-year market turmoil or losses, use Settings & Assumptions to change the current year safe return expectations to a percentage you think you will earn for the entire current year given your asset allocation. For details and instruction, see this document.
We also use your safe real interest rate when calculating the present value of your Lifetime Discretionary Spending. We discount (make less of) amounts of discretionary spending in future years. Once we discount each future year's discretionary spending, we add the annual discounted amounts together to determine their total lifetime present value. The same procedure is used to form present values of other variables shown in MaxiFi's lifetime balance sheet.
See also:
Inflation and Rate of Return Data (includes spreadsheet data)
Two Approaches and Two Purposes to Planning (why be so cautious?)