Real return strips out inflation to show what your investment actually earned in purchasing power. Includes the exact Fisher equation, examples, and why nominal returns lie.
Real Return ≈ Nominal Return − Inflation Rate (simple) | Real Return = (1 + Nominal) / (1 + Inflation) − 1 (Fisher exact)
A 7% nominal return sounds great — until you realize inflation is 4%. Your real return (what your purchasing power actually grew by) is only ~2.9%. The simple subtraction formula understates real returns slightly; the Fisher equation is exact.
The S&P 500 returned 10% nominal in the 1970s (high inflation) and 10% nominal in the 2010s (low inflation). Real returns were vastly different.
Fix: Always state whether returns are nominal or real. For long-term planning, use real returns to avoid overstating wealth growth.
If you plan to spend $50K/year in retirement and assume a 7% nominal return, you'll think you're set. But $50K in 30 years will only buy $30K worth of today's goods.
Fix: Project retirement spending in today's dollars and use a conservative real return assumption (3-4%) for planning.
The Consumer Price Index measures urban consumer inflation. Your personal inflation may differ — healthcare costs rise faster than CPI, while electronics get cheaper.
Fix: Use CPI for broad planning. For specific categories (healthcare, education, housing), research category-specific inflation rates.
The S&P 500 has returned ~7% real annually over the last 100 years. Bonds return ~2% real. Savings accounts often return 0% or negative real return after inflation. A 'good' real return is one that exceeds your personal inflation rate by enough to grow wealth in real terms.
Nominal return is the percentage gain in dollar terms. Real return is the percentage gain in purchasing power (after inflation). Example: 8% nominal with 3% inflation = 4.9% real. Always think in real terms for long-term planning.
Use the long-term average (~3%) for general planning. The Fed's target is 2%. Recent years (2021-2023) saw 4-9% inflation. For high-net-worth planning or specific scenarios, research the appropriate time period's actual inflation.
No. The IRS requires nominal returns (dividends + capital gains in dollar terms). Inflation is not considered for tax purposes. This creates the 'inflation tax' — you pay tax on gains that are merely keeping up with inflation, not real wealth growth.
See your exact investment return with our free calculator — handles dividends, taxes, and contributions.