What Return and Inflation Numbers Should You Use in Your FIRE Plan?

Every FIRE plan rests on two guesses: how fast your investments will grow, and how fast prices will rise. Change either by a single percentage point and your retirement date can move by four or five years.

With annual inflation back around 4% in Australia this year (the Australian Bureau of Statistics' monthly indicator showed 4.0% in the year to August 2026), a lot of people are asking whether the numbers in their spreadsheet still make sense. This guide shows you how to choose sensible assumptions, avoid the most common mistake, and stress-test your plan so a bad decade doesn't derail it.

Nominal vs real: the mistake almost everyone makes once

A nominal return is the headline number: your ETF went up 9% this year. A real return is what's left after inflation: if prices rose 3%, your money only buys about 6% more than it did.

The mistake is mixing the two. If your FIRE target is written in today's dollars, such as "$60,000 a year of spending", you must use real returns to project your portfolio. If you use a 9% nominal return against a today's-dollar target, your plan will look years better than it really is.

The simplest rule: do everything in today's dollars, and use real returns throughout. Your FIRE number, your savings and your portfolio balance then all mean what they say.

What returns are reasonable?

No one knows future returns. But history gives a sensible range for a diversified portfolio of shares, such as a mix of Australian and global ETFs like VAS and VGS, or an all-in-one ETF like DHHF.

Over very long periods, Australian and global shares have delivered real returns somewhere around 5% to 7% a year. Past results don't guarantee future ones, so most careful planners shave a point or two off for safety.

Don't forget fees and tax

The figures above are before costs. Two things eat into them:

• Fees. A broad index ETF might charge 0.04% to 0.30% a year. Small, but subtract it.
• Tax. Outside super, distributions are taxed at your marginal rate every year. Inside super, earnings are taxed at up to 15% while you're working and generally 0% in retirement phase.

The tax drag depends on your income and where you invest. Our guide on super or ETFs first explains why the same investment can grow faster inside super.

What inflation number should you use?

The Reserve Bank of Australia aims to keep inflation between 2% and 3% on average over time. That's why many Australian FIRE planners use 2.5% as their long-run assumption.

But "on average over time" hides a lot. Inflation can run well above the target for years at a time, as it did after 2021 and again in 2026. Two practical points:

1. If you work in today's dollars, inflation mostly drops out. You only need it to convert between nominal and real returns, or to sense-check your spending.
2. Your own inflation may differ. If rent, insurance or energy are a big share of your budget, your personal inflation could run above the official figure.

How much the numbers matter: a worked example

Say you spend $60,000 a year, so your FIRE number is $1.5 million in today's dollars (25 times spending, from the 4% rule in FIRE 101). You're starting from zero and investing $40,000 a year.

Two percentage points of return move the finish line by almost four years. That's why the assumption matters far more than the calculator you use.

Stress-testing your plan for higher inflation

A stress test asks: "What if the next ten years are worse than average?" Here is a simple three-step version you can do in a spreadsheet.

1. Run your base case. Use about 4.5% real after fees and tax.
2. Run a bad-decade case. Use 2% real for the first ten years, then your base case. High inflation periods often look like this, because shares can struggle while prices rise quickly.
3. Run a cautious case. Use 3% real the whole way.

If you can still reach FIRE within a few years of your target in the bad-decade and cautious cases, your plan is robust. If it falls apart, you have options: save a little more, aim for a slightly lower spending target, or plan for some part-time income in early retirement.

What high inflation does in retirement

Inflation matters most once you stop working. Your withdrawals rise with prices every year, so a burst of high inflation early in retirement can drain a portfolio faster than expected. A few defences help:

• Keep one to two years of spending in cash so you aren't forced to sell shares in a downturn.
• Be willing to trim spending in bad years. Even a 10% cut for a year or two makes a big difference.
• Use a slightly lower withdrawal rate if you're retiring early and your portfolio needs to last 40 years or more.

Common mistakes to avoid

• Using last year's return. A great year in the market says very little about the next 20. Stick to long-run assumptions.
• Mixing nominal and real numbers. Pick today's dollars and stay consistent.
• Ignoring tax and fees. They're small each year but large over decades.
• Not revisiting the plan. Check your assumptions once a year, not once a week. As we cover in Investing vs Trading, reacting to every headline usually costs more than it saves.

Conclusion

You don't need a perfect forecast to plan for FIRE. You need sensible assumptions, used consistently. For most Australians investing in diversified ETFs, that means working in today's dollars, using a real return of about 4% to 5% after fees and tax, and treating inflation as 2.5% over the long run while preparing for periods when it runs hotter.

Your next step: open your FIRE spreadsheet, check that your target and your returns are both in today's dollars, and run the three stress-test cases above. If your plan survives the bad-decade case, you can stop worrying about this year's inflation figure and get back to investing.