Real rate of return: what you earn after inflation

What is the real rate of return?

The real rate of return is what an investment earns after inflation: how much more your money can buy, not just how many more dollars you have. Inflation is the rise in prices over time, so each dollar buys a little less each year.

The return you see on a statement or a bank’s rate sheet is the nominal return, the growth in dollars. If your savings grew 4% in a year but prices rose 3%, you have 4% more dollars, but you can only buy about 1% more with them. That 1% is your real return, and it is the number that decides whether you are getting ahead.

Real returns matter most for long goals. Over 30 years at 3% inflation, prices more than double (×2.43), so a nominal figure that looks huge can buy far less than it sounds.

The real rate of return formula

Divide one plus the nominal return by one plus inflation, then subtract one. You divide rather than subtract because inflation shrinks the whole balance, gains included.

Economists call this the Fisher equation. It works for any period, as long as the return and inflation cover the same stretch of time.

Real return over several years

The formula works for a whole period too, as long as the return and the inflation cover the same years. Use the total growth of your money and the total rise in prices, then turn the result into a yearly rate.

Real rate of return calculator

Enter a return and an inflation rate. The calculator shows the exact real return, what the shortcut would say, and what an amount grows into both on paper and in today’s dollars.

Is the real return just the return minus inflation?

Only approximately. Subtracting inflation from the return (the Fisher approximation) is easy and close when both numbers are small. It always overstates a positive real return, and the error grows as inflation rises:

The higher inflation runs, the worse the shortcut gets: at 50% and 40% it is off by almost 3 points a year. The gap also compounds: $100,000 at 7% for 30 years is $761,226 on paper. Deflated at 3% inflation, that is $313,615 in today’s dollars, exactly what 3.88% a year gives. The 4% shortcut says $324,340, about $10,700 too much.

How do you put a goal in today’s dollars?

Divide the future amount by (1 + inflation) raised to the number of years. That converts future dollars into what they would buy today, so you can judge whether a goal is really enough.

The same idea runs the other way. If you want the spending power of $50,000 a year in 25 years, you will need $50,000 × (1.03)²⁵ = $50,000 × 2.0938 = $104,689 a year in future dollars. In a spreadsheet, =FV(3%, 25, 0, -50000) gives the same answer.

Two ways to plan, and the catch

You can plan in future dollars with a nominal rate, or in today’s dollars with a real rate. Both work if you stay consistent:

• Nominal plan: $500 a month for 30 years at 7% grows to $609,985 on paper. Divided by 2.4273, that is about $251,306 in today’s dollars.
• Raising deposits with prices: if the $500 rises 3% each year, the same 30 years ends with $833,580 on paper, or about $343,424 in today’s dollars.

The catch: planning with a real rate quietly assumes your deposits rise with inflation. If your deposits stay flat in dollars, deflate the nominal result instead. The expert freedom planner lets you set inflation and shows your balance in today’s dollars.

What has the stock market returned after inflation?

About 6.8% a year. Combining S&P 500 total returns with the government’s CPI-U price index (December to December), US stocks compounded 6.78% a year after inflation from 1928 to 2025, against 10.02% before. Prices rose about 3.04% a year, so a 1927 dollar needed $18.73 by the end of 2025 to buy the same things.

That gap is large over a lifetime. $100 invested at the start of 1928 grew to about $1,157,591 in dollars, but to about $61,799 in start-of-1928 buying power. Here is the same comparison for other stretches:

You can check any stretch yourself with the period formula above. Here is the most recent decade, step by step.

A strong decade like that one is not the norm. From 1966 to 1981, stocks gained about 6% a year in dollars and still lost buying power, because prices rose faster. Real losses are more common than dollar losses: 31 of the 98 years had a negative real return, against 26 in dollars, and 11 of 89 ten-year stretches lost buying power, against 5 in dollars. The worst ten years, 1999–2008, lost 3.8% a year after inflation. No 20-year stretch lost buying power, but the worst (1929–1948) gained only 0.6% a year.

What is the real return on a savings account?

Your savings yield minus the bite of inflation, worked out exactly. If the yield is below inflation, the real return is negative: the balance goes up, but it buys less every year.

History says cash usually runs close to inflation. From 1928 to 2025, 3-month Treasury bills (short-term government debt, a stand-in for safe cash) compounded 3.37% a year in dollars but only 0.33% a year after inflation, and they fell behind inflation in 40 of the 98 years. From 1996 to 2025 they lost a little buying power, −0.18% a year, and trailed inflation in 17 of 30 years. In 2022, Treasury bills returned 2.09% while prices rose 6.45%, a real return of −4.10%.

That does not make savings accounts bad. Cash is for safety and for money you need soon, and a near-zero real return is the price of never seeing a 20% drop. The point is to know what you are being paid, and to compare yields: at 3% inflation, a 4.5% account earns a real 1.46% and a 0.5% account loses 2.43%, a gap of almost 4 points a year on the same money.

What is the real return after tax?

Take the tax out of the nominal return first, then adjust for inflation. Tax is charged on the dollar gain, including the part that only kept up with prices, so after tax the real return can shrink to almost nothing.

Accounts that delay or remove tax on growth, such as retirement accounts, can make a big difference to the real return you keep. Fees work the same way as tax: they come straight off the nominal return before inflation takes its share.

Common mistakes

• Mixing real and nominal. A real return with a goal in future dollars (or the reverse) gives the wrong answer. Pick one kind of dollar and use it throughout.
• Subtracting when inflation is high. Below about 5% inflation the shortcut is close; above it, use the division.
• Using one recent year of inflation for 30 years. Prices rose 7.04% in 2021 and 2.68% in 2025 (December to December). A long plan needs a long-run figure.
• Treating a big future number as big. Always ask what it buys in today’s prices.
• Forgetting tax and fees. They come off before inflation, and on a low-yield account they can take most of the real return.