Real vs. nominal rates of return
I'm an ESPlanner newbie filling out my first profile. I jumped down to Assumptions and see that I need to enter the "Nominal rate of return" for my retirement accounts. I have TIPS in my retirement account, and I'm not sure what to enter here.
From what I can find on TIPS,
Nominal yield = (1 + real yield) * (1 + inflation rate) - 1
where
real yield = real rate at time of purchase.
My brokerage statement only tells me the coupon rate and APR factor (whatever that is). Is there a reference that explains how to compute the real yield from this information?
There's another problem with "inflation." The Current inflation rate number on the Economic assumptions page should be real inflation, which is running at least 7-10%, while the inflation rate used in the TIPS calculation should be the government's number(5%), which significantly understates inflation.
Am I worrying too hard about this stuff? Or should I just enter 7% as the nominal rate of return on my retirement account and 8.5% as the Current inflation rate and move on?
RSS
HI, ONE OF OUR CANNED ASSETS IS LONG-TERM INFLATION INDEXED BONDS, SO YOU CAN JUST USED THEM AND DON'T NEED TO ENTER A NEW ASSET. HAVING SAID THIS, YOUR FORMULAT IS CORRECT.
Nominal yield = (1 + real yield) * (1 + inflation rate) - 1
I THINK THAT REAL INFLATION IS WHAT THE CPI MEASURES. I REALIZE IT'S HARD TO BELIEVE, BU THERE ARE PRICES THAT HAVE DECLINED IN THIS ECONOMY -- PRICES FOR CLOTHES AND NOW HOUSING. SO JUST USE THE INFLATION-INDEXED LONG-TERM GOVERNMENT BONDS CANNED ASSET TO ENTER TIPS.