💨 Real Return & Inflation
Nominal vs real returns and purchasing power.
This strips inflation out of your nominal investment return to show your real return — the actual growth in purchasing power, which is what matters for long-term goals.
It uses the Fisher equation rather than simple subtraction:
Real Return = (1 + Nominal) / (1 + Inflation) − 1
This is more accurate than the common shortcut of just subtracting inflation from the nominal rate, especially at higher rates. It pairs naturally with Retirement Planning, where long horizons make the difference between nominal and real math large.
A 12% nominal return with 6% inflation isn't a 6% real return — the Fisher equation gives roughly 5.66%, a small but compounding difference over long horizons.
Using long-term averages for inflation when your personal inflation rate (driven by your specific spending categories — healthcare, education, housing) may run meaningfully higher than the headline CPI number.
What it does
Separates the nominal return into real growth and inflation using the Fisher equation, and shows the purchasing power of a future amount.
When to use it
Use it whenever a plan uses a return figure — a 10% number is worth a lot less once inflation takes its cut.
Assumptions
- Nominal return and inflation are constant over the period.
- Inflation compounds annually on the money value.
Plan all long-term goals in real terms. If your investment returns 10% and inflation runs 6%, your real growth is about 3.8% — that is the number that buys tomorrow's goods, and it is why beating inflation is the first job of any portfolio.