Question

Jessica Adams is 21 years old and has just graduated from college. In considering the retirement investing options available at her new job, she is thinking about the long term effects of inflation. Explain the effect of long term inflation on meeting retirement financial planning goals. If long term inflation is expected to average 4% per year and you expect a long term investment of 7% per year- what is Jessica's long term expected real rate of return (adjusted for inflation)

Answer 1

Answer:

The summary as per the given query is summarized in the explanation section below..

Explanation:

The given values are:

The nominal rate of return,

= 7%

i.e.,

= 0.07

Inflation,

= 4%

i.e.,

= 0.04

• Lengthy-term inflation would lessen the return on investment that lowers the net return as long-term investments are made.
• It can also aim to obtain a higher return that will comfortably exceed the rate of inflation and therefore is beneficial towards diminishing the average return.

Now,

The rate of return will be:

= $(\frac{1+ nominal \ rate \ of \ return}{1+Inflation}) -1$

On substituting the values, we get

= $(\frac{1+0.06}{1+0.04} )-1$

= $(\frac{1.07}{1.04} )-1$

= $1.028846-1$

= $2.8846 \ percent$

Therefore it isn't able to measure the average return rate because the quantity of years for its expenditure.