Your Money Over Time: The Fundamental Differences Between Today’s Dollars and Tomorrow’s Dollars

Let’s face it, money can be confusing. You may think it’s “just math,” but the reality of personal finance is that there is no one “right” answer. In fact, even when evaluating the numbers in a financial forecast, there are different ways to view the value of your money. You can value your financial future in future dollars or today’s dollars and the difference can be hundreds of thousands of dollars or even millions… and there’s nothing wrong with that.

Huh? Let’s explore.

Financial forecasting is an abstract concept.

Financial forecasts are a means of predicting the future. As with all forecasts, forecasts are subject to error and interpretation.

These calculations involve complex mathematical principles and predictions that extend beyond direct, tangible experiences. These calculations require an understanding of variables such as inflation, interest rates, and the time value of money, which cannot be directly observed in everyday life.

For example, calculating the future value of an investment involves forecasting how money will grow over time, taking into account compound interest and fluctuating economic conditions. This requires abstract thinking and understanding hypothetical scenarios that may be difficult for many people to understand intuitively, especially without a background in finance or economics.

The abstract nature of these accounts can make financial planning difficult, as they require visualizing and measuring future financial results based on current and projected data.

Comparing future values ​​to current values ​​can help you understand your future.

Your financial forecast can be viewed in several ways. Two common ways to review forecasts are to look at numbers in either current dollars or future dollars.

Today’s dollar forecasts do not take inflation into account in future values. Future dollar expectations include inflation. Let’s take a look a little deeper:

What are the “dollars of the future”?

Future dollars, also known as nominal dollars or face value, represent the expected value of money that accounts for inflation. A future dollar is usually worth more than today’s dollar.

In other words, future dollars represent the purchasing power of money at a specific point in the future. Because of 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 the inflation rate is 2% per year, something that costs $100 today might cost about $121 in 10 years.

Calculations in future dollars may be more “accurate.” However, understanding future dollars may be more difficult than understanding numbers in current 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 current economic conditions, without any adjustments for inflation. In other words, the outlook for the dollar today does not inflate money with inflation assumptions. Your accounts will continue to grow if you have investment returns, but the values ​​will not reflect the impact of inflation.

If you revise your forecasts in today’s dollars, future values ​​are more closely related. It is a scale that represents your current understanding of the value of money.

The impact of today’s dollars versus future dollars on your financial outlook

When assessing your future financial security, there can be a difference of hundreds of thousands of dollars between seeing your plan’s projections in current dollars versus future dollars.

Future dollars are arguably more accurate, but today’s dollars may make more sense to you.

Examples of current dollar vs future dollar

Spending

If you expect to need $100,000 a year in retirement, future dollar projections might show you’ll need $120,000 a year in 20 years due to inflation.

Using today’s dollars, the same projection would show that you would need $100,000 per year, without adjusting for future inflation.

Although easy to understand, today’s dollars do not provide a complete picture of how much you will actually need in the future.

savings

Let’s say you have $1 million today. The average rate of return is 8%, and the average inflation rate is 3% over the next 20 years.

• In today’s dollars, your money in 20 years would be worth $2,653,297.
• In future dollars, that would be $4,660,957.

Today’s and Future’s Dollars in New Retirement Plan

There are two numbers in the new retirement plan:

• that you enter
• Those that are calculated and displayed as your forecast.

Here’s a summary of how the concepts of today’s dollars and future dollars apply to both your inputs and projections in the NewRetirement Planner.

Outputs: You now have the option to view all calculations and forecasts in either current dollars or future dollars. It may be helpful to switch between the two types of forecasts to help you gain a better understanding of your financial projections.

Input: Almost all inputs into the new retirement scheme are entered in “today’s dollars” (today’s value of money). However, there are a few exceptions.

Here are the only inputs you need to enter in future dollars:

• Future primary residence for planned move
• Buying real estate in the future
• Lump pensions
• Future pensions
• Windfall gains
• One-time expenses
• Expenses
• Transfers

How to compare your own future expectations and today’s dollar values

The new Retirement Planner puts the power of financial wellness in your hands. Now you can view any and all expanded insights, charts and other projections in today’s dollars or future dollars, there

The switch between the two projection types can be found in the top navigation bar on all pages in the chart.

• Look at the top right of the top navigation bar.
• Click the Defaults tab.
• Scroll down to the button labeled: “View Projections in”
• Click the option you want to view.
• Switch between today’s dollars and future dollars on any page.

Log in to NewRetirement Planner now to compare your future and today’s values!