Nominal versus real returns
The return printed on a statement is the nominal return: how much the balance grew in dollars. But a dollar buys less every year that prices rise. The real rate of return removes inflation and tells you how much your purchasing power actually grew. An account that earns 3% while prices rise 3% has made no real progress at all.
The Fisher equation
- After-tax nominal return = nominal return × (1 − tax rate)
- Real return = (1 + after-tax nominal return) ÷ (1 + inflation) − 1
- Quick approximation = nominal return − inflation
The approximation is fine for small numbers, but it always overstates the real return a little, and the gap widens when rates are high.
Worked example
You invest $10,000 for 10 years at a 7% nominal return, inside a tax-advantaged account, with 3% inflation.
- Real return = 1.07 ÷ 1.03 − 1 = 3.88% a year (the approximation says 4.00%).
- Future balance = 10,000 × 1.07¹⁰ = $19,672.
- In today’s dollars, that balance is worth 10,000 × 1.0388¹⁰ = $14,637.
- Inflation eats $5,034 of purchasing power along the way.
The same investment at other inflation rates
| Inflation | Real return | Value in today’s dollars |
|---|---|---|
| 0% | 7.00% | $19,672 |
| 2% | 4.90% | $16,137 |
| 3% | 3.88% | $14,637 |
| 4% | 2.88% | $13,289 |
| 6% | 0.94% | $10,984 |
| 8% | −0.93% | $9,112 |
Taxes make it worse
In a taxable account, taxes apply to the whole nominal gain, including the part that only keeps up with inflation. At a 7% return taxed at 24% with 3% inflation, the after-tax return is 5.32% and the real return falls to 2.25%: taxes take a quarter of the nominal gain but more than 40% of the real gain. That is one reason tax-advantaged accounts such as 401(k)s, IRAs and HSAs matter so much over long periods.
Typical real returns
Over the long run, US stocks have delivered real returns of roughly 6 to 7% a year, bonds about 2 to 3%, and cash close to zero, with large swings between decades. Treasury Inflation-Protected Securities (TIPS) and I bonds quote their yields partly in real terms, which makes them easy to compare with this calculator’s result.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.