Question

In order to calculate the amount of money needed to maintain a standard of living 20 years from now, you attempt to calculate an FV (20 years from now) of today's living expenses. What would be most appropriate for you to use as the interest rate?
Money market rate
Expected inflation rate
Average market rates of return
Average market return + inflation

Answer 1

Answer:

Expected inflation rate

Explanation:

Expected Inflation rate would be the most appropriate rate to use as interest rate in the calculation because it gives a somewhat accurate picture of how prices will behave in the coming years, and therefore, of how cost of living will evolve, and how much money will be needed to maintain your living standards 20 years from now.

Expected inflation is never a completely accurate measure though, and it can be sensitive to economic or political shocks, so it should be used with caution and keeping that in mind.