What is a real return?
A real return is the growth in what your money can buy, after inflation. The return quoted on an account or investment is the nominal return: it counts currency units. If prices rise over the same period, part of that growth only keeps pace with prices, and the real return is what is left.
With the defaults, a 7% return and 3% inflation give a real return of 3.88% a year. Most people subtract and say 4%; the exact figure is lower by 0.12 points. Over 20 years, $10,000 at 7% becomes $38,697 in the account, and that buys what $21,426 buys today. Left uninvested, the same $10,000 would buy only what $5,537 buys today.
Both rates are yours to enter. The page holds no inflation statistics and no market data, so try the figure from your country's statistics office, or several rates, to see the range.
What is the Fisher equation for real return?
The exact link between the two rates is (1 + nominal) = (1 + real) x (1 + inflation), named after the economist Irving Fisher. Rearranged: real = (1 + nominal) / (1 + inflation) - 1.
Step by step for the default inputs: 1 + 0.07 = 1.07; 1 + 0.03 = 1.03; 1.07 / 1.03 = 1.038835; minus 1 gives 0.038835, or 3.8835%. The quick estimate, nominal minus inflation, is 7% - 3% = 4%. It ignores the cross term: inflation also erodes the return earned during the year, not just the starting money.
The same relationship links the money (nominal) discount rate and the real discount rate in investment appraisal, where cash flows that include inflation are discounted at the money rate and flows in today's prices at the real rate. Mixing the two is a classic exam error.
How accurate is subtracting inflation from the return?
Close at low rates and increasingly wrong as rates rise. At a 7% nominal return:
| Inflation | Exact real return | 7% minus inflation | Gap (points) |
|---|---|---|---|
| 2% | 4.90% | 5.00% | 0.10 |
| 4% | 2.88% | 3.00% | 0.12 |
| 6% | 0.94% | 1.00% | 0.06 |
| 10% | -2.73% | -3.00% | 0.27 |
| 20% | -10.83% | -13.00% | 2.17 |
When both rates are high the shortcut overstates real growth badly: a 30% return with 20% inflation is a real return of 8.33%, not 10%. With a 100% return and 90% inflation, the exact figure is 5.26% against a subtraction of 10%. The second chart under the calculator draws this gap for the return you enter.
How much does inflation reduce purchasing power over time?
Money left uninvested loses buying power at the inflation rate, compounded. At an assumed 3% a year, $10,000 kept as cash buys:
| After | Prices have risen by a factor of | $10,000 buys what this buys today |
|---|---|---|
| 1 year | 1.03 | $9,708.74 |
| 10 years | 1.3439 | $7,440.94 |
| 20 years | 1.8061 | $5,536.76 |
| 30 years | 2.4273 | $4,119.87 |
At 3% inflation, prices double in 23.4 years; the rule of 72 estimates 24. The calculator gives the doubling time for any positive rate you enter, along with the nominal return you would need simply to stand still.
How does tax drag change your real return?
Tax is usually charged on the nominal return, including the part that only makes up for inflation. That makes tax bite harder in real terms than the headline rate suggests. Under Tax drag, enter a flat share of each year's return:
- With 25% tax, a 7% return becomes 5.25% after tax, and the real return at 3% inflation falls from 3.88% to 2.18%. $10,000 after 20 years is worth $15,406 in today's money instead of $21,426.
- With 40% tax, 7% becomes 4.2% and the real return is 1.17%.
To keep pace with 3% inflation after 25% tax, the return before tax must be 4%; after 40% tax, 5%. The rate is one simple number here; real tax rules have allowances, bands and tax-free accounts, which can make the real drag smaller or larger.
Worked examples in pounds and euros
- Pounds, inflation above the return. £10,000 earning 5% a year while prices rise 10% a year has a real return of -4.55% (the subtraction says -5%). After 10 years the account shows £16,288.95, but that buys only what £6,280.09 buys today. Left in cash it would buy £3,855.43 of today's goods.
- Euros, a modest real gain. €20,000 earning 4% with 2% inflation has a real return of 1.96%. After 15 years the balance is €36,018.87, worth €26,762.55 in today's money, against €14,860.29 if left idle.
Switch the currency selector for any of 24 currencies; amounts are formatted, never converted.
What about losses or falling prices?
The formula works for negative numbers too. A 10% loss in a year of 3% inflation is a real return of -12.62%: $10,000 falls to $5,904.90 over 5 years, which buys what $5,093.62 buys today. Losses are not taxed in this calculator.
When prices fall, a small nominal return becomes a larger real one. A 2% return with prices falling 1% a year is a real return of 3.03%, and after 10 years $10,000 grows to $12,189.94 that buys what $13,478.75 buys today.
How do you calculate real return in Excel or Google Sheets?
No special function is needed. With the nominal return in B1 and inflation in B2, both as percentages, type =(1+B1)/(1+B2)-1 and format the cell as a percentage: 7% and 3% give 3.88%. For the value in today's money after a number of years in B3, with the amount in B4, use =B4*(1+B1)^B3/(1+B2)^B3; for the defaults that returns 21,425.50.
To work backward from a real return you want to the nominal return that delivers it, use =(1+real)*(1+inflation)-1: a 4% real return at 3% inflation needs a 7.12% nominal return.
Common real return mistakes
- Subtracting at high rates. Above a few percent the shortcut drifts away from the exact figure, as the table above shows.
- Comparing different periods. A 3-year cumulative inflation figure cannot be set against a yearly return.
- Mixing real and nominal figures. Discount nominal cash flows at a nominal rate and real cash flows at a real rate, never across.
- Forgetting tax and fees. Both come out of the nominal return, before inflation is considered.
- Treating one inflation rate as everyone's. A published rate averages a basket of goods; your own spending may rise faster or slower.
What this calculator leaves out, and a glossary
It applies one return and one inflation rate to every year. Real returns and real inflation change every year, and investment returns can be negative for long stretches, so the results are arithmetic on assumptions. Fees and the timing of contributions are not modelled; for growth with regular saving, use the compound interest calculator, which can also show a result in today's money.
Nominal return: growth measured in currency units. Real return: growth in purchasing power after inflation. Inflation rate: the yearly rise in the general price level. Fisher equation: (1 + nominal) = (1 + real) x (1 + inflation). Purchasing power: the goods and services an amount of money can buy. Tax drag: the reduction in growth caused by tax on returns.
Frequently asked questions
How do I calculate real return?
Divide 1 plus the nominal return by 1 plus inflation and subtract 1. A 7% return with 3% inflation gives 1.07 / 1.03 - 1 = 3.88% a year.
Is real return just the return minus inflation?
Only approximately. Subtracting gives 4% for a 7% return and 3% inflation, while the exact figure is 3.88%. The gap grows with the rates: at 30% and 20%, subtraction says 10% while the exact real return is 8.33%.
What is the Fisher equation?
It states that (1 + nominal rate) = (1 + real rate) x (1 + inflation rate). Rearranging it gives the exact real return or, the other way round, the nominal rate needed for a given real return.
What return do I need to beat inflation?
Any nominal return above the inflation rate gives a positive real return before tax. After tax, you need more: with 3% inflation and 25% tax on returns, the return before tax must exceed 4%.
How much will $10,000 be worth in 20 years after inflation?
At a 7% return and 3% inflation it grows to $38,697 in the account, which buys what $21,426 buys today. Kept as cash at 3% inflation, it would buy what $5,537 buys today.
Can a real return be negative?
Yes. When inflation is higher than the return, the money buys less each year even though the balance grows. A 5% return with 10% inflation is a real return of -4.55%.
Does tax affect the real return?
Yes, often by more than people expect, because tax is charged on the full nominal return. A 7% return taxed at 25% is 5.25% after tax, and at 3% inflation the real return drops from 3.88% to 2.18%.
Where do I find the inflation rate to use?
Your national statistics office publishes the consumer price inflation rate for your country. This calculator does not fill one in; enter the latest published figure, or test several rates to see how sensitive the result is.
Can I use this real return calculator in pounds, euros or dirhams?
Yes. The return and inflation are percentages, so the real return is the same in any currency. Choose from 24 currencies to see the money figures formatted in yours; nothing is converted.
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Last reviewed 13 November 2026 by the NIFM Academy editorial team. Next review by 13 November 2027.
- Fisher equation, (1 + nominal) = (1 + real) x (1 + inflation); real = (1 + nominal) / (1 + inflation) - 1, shown with your numbers in the working under every result. Checked 13 November 2026.
- Purchasing power arithmetic, value in today's money = future amount / (1 + inflation)^years; doubling time of prices = ln 2 / ln(1 + inflation). Checked 13 November 2026.