Written By: William B. Joyce

Retirement planning requires care to distinguish between the promised nominal rate and the real interest rate: that is, the rate at which the real value of the investment grows. Nominal cash flows (measured in current dollars) should be discounted at nominal rates. Real cash flows (measured in constant dollars) should be discounted at real interest rates. Nominal and real rates of interest should not be mixed and matched. The consequences of a poor forecast are explored to demonstrate the importance of correctly estimating real interest rates. Key Words: Inflation, Time value of money, Rates of return

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