Real return calculator: what remains after inflation?

A larger account balance does not necessarily mean more purchasing power. Put the nominal return and inflation in the same calculation to see what the future balance may be worth in today's money.

How to read it

Start with the real annual return, then check the ending purchasing power. A negative real return means purchasing power may shrink even while the balance rises. A positive result is not a promise because actual returns and inflation change.

Continue with the inflation calculator and allocation guide.

The real return formula

This page uses the Fisher relationship, which fits on one line:

Real return = (1 + nominal return) ÷ (1 + inflation) − 1

Plenty of places use a shortcut instead: real return ≈ nominal return − inflation. When inflation is low the two barely differ; when it is high the gap becomes real. The same pair of figures makes it obvious:

• Nominal 6%, inflation 4%: the shortcut says 2%, the exact formula says 1.92%. A gap of 0.08 percentage points, safely ignorable.
• Nominal 20%, inflation 15%: the shortcut says 5%, the exact formula says 4.35%. A gap of 0.65 percentage points, no longer ignorable.

So in a mild-inflation environment, subtracting is good enough. Where inflation runs high, use the exact form, otherwise you will systematically overstate what you are really earning.

Why subtracting is not quite right

The thought “I earned 5%, prices rose 3%, so I am up 2%” feels natural, but it misses something: inflation acts on the money you just earned as well as on the money you started with.

Both the original sum and the gain end up in the same more expensive world, so the whole ending balance has to be divided by the rise in prices rather than having two percentages subtracted from one another. Subtraction survives at low inflation only because the term it drops (nominal × inflation) is tiny when both numbers are small. Make them larger and it surfaces.

How the ending purchasing power is worked out

The second figure in the result takes two steps:

• Compound the nominal return to get the balance on paper: starting amount × (1 + nominal return)^years
• Discount it back to today using the same number of years of price rises: ÷ (1 + inflation)^years

That is the same thing as starting amount × (1 + real return)^years, just computed in a different order. It answers one specific question: what the number in the account at the end would actually buy at today's prices.

What this number cannot tell you

Treat the result as an input to a plan, not as a forecast. There are at least four things it does not include:

• Tax and fees. Interest tax, capital gains tax, entry and exit charges and spreads all come out of the nominal return first. Inflation only gets what is left.
• Volatility. The model assumes the same return every year, and almost no asset behaves that way. With the same average return, a different path can leave you far worse off if you are forced to sell partway through.
• Inflation moves too. You enter one fixed figure, while real inflation differs year to year, especially over longer periods.
• Official inflation is not your inflation. The published figure measures a basket for an average household, and your spending may look nothing like it. Why cash loses value goes into this in more detail.

A more useful habit is to run the number as a range: enter a higher inflation figure, then a lower one, and see whether the conclusion flips. If it only works under the most optimistic assumption, that is your answer already.

FAQ

What is the formula for real rate of return?

Real return = (1 + nominal return) ÷ (1 + inflation) − 1, known as the Fisher relationship. The common shortcut is nominal return minus inflation, which is close enough at low inflation but overstates the real figure when inflation is high, so use the exact form there.

Why can't I just subtract inflation from the nominal return?

Because inflation acts on the gain as well as on the original amount. Subtracting two percentages drops the nominal times inflation term, which is negligible when both are small and obvious when they are not. At a nominal 20% with 15% inflation, subtraction gives 5% while the exact calculation gives 4.35%.

What does a negative real return mean?

The balance is rising, but not as fast as prices, so the purchasing power of that money is shrinking. It does not necessarily mean you did anything wrong; that class of asset may simply not keep pace in the current inflation environment. The point is to see it clearly rather than to chase a higher nominal number because of it.

Which inflation rate should I use?

The published national figure is a reasonable starting point, but it measures a fixed basket for an average household. If your spending leans heavily on things that rise quickly, such as rent, education or healthcare, your felt inflation runs higher and the official number will make the real return look better than it is. Run it once high and once low and see whether the conclusion holds.