Inflation is the rate at which the overall price level rises, eroding what each dollar can buy. At 3% annual inflation, today’s $100 buys only about $74 worth of goods in ten years.
Inflation is why long-term money must be invested rather than merely saved: returns below inflation are losses in real terms. When projecting decades ahead, planners often use a real return — expected return minus expected inflation.
Model real returns in the Retirement Savings Calculator.