Inflation erodes purchasing power exponentially. A 3% annual inflation rate does not cut your buying power by 60% over 20 years — it cuts it by 45%, because the erosion compounds. Each year, last year's already-eroded dollar loses another 3%.
The formula
Future purchasing power = Today's amount ÷ (1 + inflation rate)^years
$50,000 today at 3% inflation for 20 years = $50,000 ÷ 1.03^20 = $50,000 ÷ 1.806 = $27,684 in real buying power. You would need $90,306 in 2046 dollars to buy what $50,000 buys today.
The real return
The only number that matters for long-term wealth is your real return — your nominal investment return minus inflation. An 8% nominal return with 3% inflation is a 4.85% real return. A 2% savings account with 3% inflation is a -1% real return — you are losing money safely. Cash is not risk-free; it is guarantee-loss.
Historical inflation context
The U.S. has averaged 3.2% inflation since 1926. The 1970s saw 7-13% inflation. The 2010s saw 1-2%. The 2020s saw a peak of 9.1% in mid-2022. Use 3% for long-term planning, but stress-test with 5% to see what happens if inflation runs hotter than expected.