Real return
Real return is an investment's return after inflation — the change in what your money can actually buy. A 5% return with 3% inflation is about 2% real.
Also called inflation-adjusted return, real interest rate
A 5% return feels like a gain until you notice prices rose 3% over the same year. Real return adjusts for that: approximately the nominal return minus inflation, and exactly (1 + return) ÷ (1 + inflation) − 1.
For 5% and 3% the exact figure is 1.94% rather than 2% — close enough for intuition, but worth computing precisely over long periods.
Real return is the honest test of a savings account. If cash pays 4% while inflation runs at 3.5%, the real gain is half a percentage point, and after tax it can be negative. Over ten years, nominal and real balances diverge sharply, which is why long-run projections are more useful in today's dollars.
Common questions
How do I calculate real return?
Divide one plus the nominal return by one plus inflation, then subtract one. For 5% and 3%: 1.05 ÷ 1.03 − 1 = 1.94%.
Can real return be negative?
Yes. When inflation outruns the after-tax return, purchasing power falls even though the balance rises.