Understanding Nominal and Real Dollars in Financial Planning
When looking at money over time, especially in long-term planning, it is important to understand whether figures are shown in nominal dollars or real dollars.
You can use nominal or real numbers can be used to project out account balances, expenses, income, and more. Each is useful in its own way.
What is Nominal vs Real?
Let’s start with simple definitions:
- Nominal dollars are the actual expected dollar amounts we expect to see now and in the future. You see Nominal Dollars on statements, paychecks, and account balances at face value.
- Real dollars are dollars adjusted for inflation, showing what that money can actually buy in today’s terms. A related term is “purchasing power”. It’s how much those dollars now and in the future can actually buy.
A Couple of Examples
Income Example
Let’s say you start a job earning $75,000 per year. 10 Years from now you’re earning $90,000 per year.
Over those 10 years, your annual income has increased by $15,000 per year.
So far, these values are all in nominal dollars. $15,000 more per year sounds good on the surface but are you better off?
That’s where real dollars come into play.
If you start with $75,000 and inflate that by 3% per year for 10 years, you end up with $100,793. So in real terms, $75,000 today is the same as $100,793 in 10 years.
In this case, your salary of $90,000 is lower than $100,793 which means your income has not kept up with inflation which means from an income perspective you’ve lost purchasing power.
House Example
In 1960, the average home price in the US was $19,200.
By 1980, the average home price has risen to $55,074.
In 2000, it was $131,400.
In 2020, home prices rose to $266,097.
And finally, as of 2025, average home prices are $424,400.
How do we make sense of this?
The numbers I presented here are in nominal dollars. There are two ways to look at this.
- In today’s dollars looking back
- In historic dollars looking forward
How Nominal vs Real Returns are Applied In Financial Plans
Nominal returns are used when projecting actual account balances because portfolios grow in real-world dollars that will ultimately be reported on statements and used to fund withdrawals.
However, spending goals are often defined in today’s purchasing power, which requires converting projections into real terms to preserve lifestyle consistency over time.
The key is alignment: returns, inflation assumptions, tax projections, and spending targets must all operate in the same framework. When they do, the plan reflects not just how large a portfolio may become, but what that portfolio can actually buy in the future.
Which is Better?
Both nominal and real have their place in a financial planning projection. It’s important to understand that different expenses inflate at different rates and being able to see what the true potential future cost of an item is a good conversation.
When generating a target portfolio balance that can sustain a lifestyle, using nominal dollars is the way to go as that is most related to what actual dollar amounts you should be looking for.
However, for most planning purposes, seeing projected expenses in real dollars makes the most sense for good planning.
A Few Cautions
With very long projections, viewing account projections in nominal terms can be confusing. For example, consider this projection of a projected portfolio in nominal terms.
The portfolio begins and ends with ~$3M to $3.5M. One might be tempted to say that this projection can support a whole lot more spending as you ended with what you started with. However, what is not considered in this chart is that expenses are now much higher than they were at the beginning.
A more accurate projection is the same chart but in Real dollars – what the portfolio can buy. By adjusting for inflation, the chart looks vastly different with the portfolio starting at $3M in real dollars but then ending just under $1M in real terms.
So in this example, just over $3M in the future is the same as just under $1M in today’s dollars.
This is for a ~40 year projection. As the time lengths, the effect is even more pronounced.
If you have ever had a financial advisor show you ending your life with tens or hundreds of millions of dollars, unless you’re starting with that amount of money, it’s likely you’re seeing nominal and not real dollars.