Glossary
Real return
An investment’s return after subtracting inflation, showing the change in actual purchasing power rather than in dollars.
On this page
A real return is what an investment earned after accounting for inflation. The headline or "nominal" return tells you how many more dollars you have; the real return tells you how much more you can actually buy. In a year when prices rise 4%, a 4% gain leaves you exactly where you started in purchasing power. For long-term goals like retirement, the real return is the number that matters.
How it works
The quick approximation subtracts the inflation rate from the nominal return. The exact version, known as the Fisher equation, divides instead:
The gap between the two formulas is small at low inflation and grows when inflation is high.
Why it matters
- Compounding. Over 30 years, a 7% nominal return becomes about 7.6 times your money, while a 4% real return is about 3.2 times. With 3% inflation, those describe roughly the same investment, so planning in real terms keeps targets honest.
- Cash and bonds. When savings rates sit below inflation, holding cash produces a negative real return even though the balance never falls.
- Inflation-protected bonds. Treasury Inflation-Protected Securities quote a real yield directly, because their principal adjusts with CPI.
Taxes reduce real returns further. A 5% taxable return with 3% inflation and a 24% tax rate leaves an after-tax nominal 3.8% and a real return of only about 0.8%, because tax is charged on the inflation part of the gain too.