The Role of Inflation in Retirement Planning – Why Reducing Nominal Risk can Increase Real Risk

In order to make good decisions in retirement planning, consumers’ and advisors’ need to understand the return potential and the risks of the respective products. Usually, risk-return indicators are based on nominal measures, derived from the probability distribution of nominal wealth at the end of the product’s term. For consumers, however, real benefits (i.e., the benefits in ‘today’s purchasing power’) are more relevant than nominal benefits. We show that real risk-return characteristics can be structurally different from nominal risk-return characteristics, in particular for products that come with some nominal guarantees.