Planit:What's the Significance of the Inflation Rate When You are Just Doing an IPS?

From Planipedia

The inflation rate is used in the forward projection of rates of return. For example, Canadian Equities might have an historical return of 10% for the past 40 years. The corresponding inflation rate for the same 40-year period might be 4.75%. Thus the “Real Rate of Return” would be 5.25% (10% – 4.75%.)

We then add the client’s inflation assumption to that real return of 5.25% to get the forward-looking rate of return. Thus if the client’s inflation rate was 3%, the forward-looking return would be 8.25% (5.25% + 3%) or if the inflation assumption was 4%, the return would be 9.25% (5.25% + 4%).

This recognizes the fact that there is a definite correlation between inflation rates and rates of returns on virtually all asset classes.