The real return calculator shows your true inflation-adjusted investment gain. A 7% nominal return with 3% inflation delivers only ~4% real growth. See year-by-year purchasing power and how inflation erodes the value of your portfolio over time.
How to Calculate Real Return
The real return formula is: Real Return = (1 + Nominal Return) ÷ (1 + Inflation Rate) − 1. For 8% nominal and 2.5% inflation: (1.08 ÷ 1.025) − 1 = 5.37% real return. The simplified approximation (8% − 2.5% = 5.5%) is close but slightly overstates the real return.
Why Real Returns Matter for Planning
When planning retirement, using nominal returns overstates your future purchasing power. A $1,000,000 portfolio in 30 years at 3% inflation has only $412,000 of today's purchasing power. Financial plans should use real (inflation-adjusted) figures to ensure the projected lifestyle is actually achievable.
FAQ
What is real return vs nominal return?
Nominal return is the stated investment return before adjusting for inflation. Real return is what you actually gained in purchasing power. Formula: Real Return ≈ Nominal Return − Inflation Rate. More precisely: Real Return = (1 + Nominal) ÷ (1 + Inflation) − 1.
What is the historical real return of stocks?
The US stock market has delivered approximately 7% average nominal return and 4-5% real (inflation-adjusted) return over the long run. The 2000-2020 period saw lower real returns due to periods of high valuations and low growth.
How does inflation erode returns?
Even modest 3% annual inflation halves purchasing power in about 24 years. A 6% nominal return with 3% inflation delivers only 3% real growth. Over 30 years, $100,000 at 6% nominal grows to $574,000 — but in today's dollars (adjusted for 3% inflation), that's only about $236,000 of real value.
Does inflation affect bonds and cash differently?
Yes. Bonds with fixed interest payments are most vulnerable to inflation — their real value erodes if inflation rises above the coupon rate. Cash savings earn near-zero after inflation. Stocks and real estate have historically provided better inflation protection over long periods.