Let’s face it, money can be confounding. You might think it’s “just math,” but the reality of personal finance is that there is never just one “right” answer. In fact, even when evaluating the numbers in financial projections there are different ways of viewing the value of your money. You can evaluate your financial future in future dollars or today’s dollars and the difference can be hundreds of thousands of dollars or even millions… and neither is wrong.
Huh? Let’s explore.
Financial Projections Are an Abstract Concept
Financial projections are a way of foretelling the future. Like all fortune telling, projections are fallible and open to interpretation.
These calculations involve complex mathematical principles and projections that extend beyond immediate, tangible experiences. These calculations require understanding variables such as inflation, interest rates, and the time value of money, which are not directly observable in everyday life.
For example, calculating the future value of an investment involves predicting how money will grow over time, accounting for compounding interest and fluctuating economic conditions. This requires abstract thinking and a grasp of hypothetical scenarios that can be difficult for many people to intuitively understand, especially without a background in finance or economics.
The abstract nature of these calculations can make financial planning challenging, as it requires envisioning and quantifying future financial outcomes based on current and projected data.
Comparing Future and Today’s Values Can Help You Understand Your Future
Your financial projections can be displayed in a variety of ways. Two common ways to reviewing projections are to look at the numbers in either today’s dollars or future dollars.
Projections in today’s dollars do not factor inflation into the future values. Projections in future dollars do include inflation. Let’s take a slightly deeper look:
What Are “Future Dollars”?
Future dollars, also known as nominal dollars or nominal value, represent the projected value of money accounting for inflation. Future dollars typically have a higher value than today’s dollars.
In other words, future dollars represent the purchasing power of money at a specific point in the future. Due to inflation, the value of money tends to decrease over time, meaning that a dollar in the future will generally buy less than a dollar today. For example, if inflation is 2% per year, something that costs $100 today might cost about $121 in 10 years.
Calculations in future dollars can be more “accurate.” However, future dollars can be more difficult to understand than numbers in today’s dollars.
What Are “Today’s Dollars”?
Today’s dollars, also referred to as current or real dollars, represent the purchasing power of money in terms of the present economic conditions, without any adjustments for inflation. In other words, projections in today’s dollar do not inflate the money with inflation assumptions. Your accounts will still grow if you have investment returns, but the values will not reflect the impact of inflation.
If you review your projections in today’s dollars, the future values are more relatable. They are in a scale that represents your current understanding of the value of money.
The Impact of Today’s Dollars vs. Future Dollars on Your Financial Projections
When evaluating your future financial security, there can be hundreds of thousands of dollars in difference between seeing your plan projections in today’s vs. future dollars.
Future dollars are arguably more accurate, but today’s dollars may make more sense to you.
Examples of Current vs. Future Dollars
Spending
If you expect to need $100,000 per year in retirement, future dollar projections might show you needing $120,000 per year in 20 years due to inflation.
Using today’s dollars, the same projection might show you needing $100,000 per year, without adjusting for future inflation.
While simpler to understand, today’s dollars don’t provide a complete picture of how much you’ll actually need in the future.
Savings
Let’s say you have one million dollars today. It earns an average 8% rate of return and inflation is at an average of 3% for the next 20 years.
- In today’s dollars, the value of your money in 20 years is $2,653,297
- In future dollars, it is $4,660,957
Today’s and Future Dollars in the NewRetirement Planner
There are two types of numbers in the NewRetirement Planner:
- The ones you input
- The ones that are calculated and displayed as your projections
Here is a rundown of how the concepts of today’s dollars and future dollars are applied to both your inputs and your projections in the NewRetirement Planner.
Outputs: You now have a choice to view all calculations and projections in EITHER today’s dollars or future dollars. It can be useful to toggle between the two types of projections to help you gain a greater understanding of your financial projections.
Inputs: Almost all inputs in the NewRetirement Planner are entered in “today’s dollars” (the value of the money today). However, there are a few exceptions.
The following are the only inputs that you should be entering in future dollars:
- Future primary residence for a planned relocation
- Future real estate purchase
- Lump sum pensions
- Future annuities
- Windfalls
- One-Time Expenses
- Disbursements
- Transfers
How to Compare Your Own Projections in Future and Today’s Dollar Values
The NewRetirement Planner puts the power of financial wellness into your own hands. You can now view any and all of the expansive insights, charts, and other projections in either today’s dollars or future dollars, there
The toggle to switch between the two types of projections is found in the top navigation bar on all pages in the Planner.
- Look in the upper right of the top navigation bar
- Click on the Assumptions tab
- Scroll down to the toggle labeled: “View Projections In”
- Click the option you want to view.
- Toggle between Today’s dollars and Future dollars on any page
Log into the NewRetirement Planner now to compare your future and today’s values!
