Real return calculator
What a return is worth after inflation and tax — the growth in what the money can actually buy.
Buying power after 20 years
$222,748
in today's money, from a headline balance of 386,968
- Real return
- 4.09%
- Headline balance
- $386,968
- Lost to inflation
- $164,221
| Nominal return | 7% |
|---|---|
| After tax | 7% |
| Inflation | -2.8% |
| Real return | 4.09% |
A 7% return with 2.8% inflation is a real 4.09%, not 4.2% — the difference is small annually and visible over 20 years.
How this is calculated
How this is calculated
Divide, do not subtract
The real return is (1 + nominal) ÷ (1 + inflation) − 1. At 7% and 2.8% that is 4.09%, where subtraction gives 4.2%. The gap widens as inflation rises: at 10% inflation, subtraction is out by nearly a full point.
real = (1 + nominal) / (1 + inflation) − 1Tax comes off first
Tax applies to the nominal return, including the part that only compensated for inflation. That is why a 4% deposit rate at 30% tax and 2.8% inflation leaves you slightly poorer in real terms despite a positive headline rate.
Worked example: $100,000 at 7% for 20 years, inflation 2.8%
| Amount | $100,000 |
|---|---|
| Return | 7% |
| Inflation | 2.8% |
| Years | 20 |
| Headline balance | $386,968 |
|---|---|
| Buying power | about $223,000 |
| Real return | 4.09% |
The headline balance nearly quadruples while what it buys only doubles. Both statements are true, and only one of them matters.
What this assumes
- Inflation is constant across the period.
- Tax is charged annually on the return.
- No further deposits or withdrawals.
- Your personal inflation matches the headline rate.
Where this commonly goes wrong
- Tax applies to the whole nominal return, including the portion that only kept pace with inflation — an effective tax rate above 100% of the real gain is possible on cash.
- Headline inflation is an average basket. Housing, healthcare and education have run well above it for decades, so a personal rate is often higher.
- Projections quoted "in today’s money" already have inflation removed; deducting it again double-counts and makes the outcome look far worse than it is.
Questions
What is a real return?
The growth in what your money can buy, after inflation has been removed. A 7% return during 7% inflation is a 0% real return: the balance is larger and buys exactly the same.
Why not just subtract inflation from the return?
Because both compound. The exact relation is (1 + nominal) ÷ (1 + inflation) − 1. At low inflation subtraction is close enough; at 10% inflation it overstates the real return by almost a full percentage point.
Does tax make cash a losing proposition?
Often, yes. A 4% savings rate taxed at 35% nets 2.6%. With inflation at 2.8%, the real return is slightly negative — the balance grows and the buying power shrinks.
What inflation rate should I use?
Long-run headline inflation in your country, typically 2–3% for developed economies with an inflation target. If most of your spending is housing or healthcare, model a point or two higher.
Should retirement projections use real returns?
Yes, and then keep the target in today’s money too. Mixing a nominal return with a target in today’s prices is the most common way a retirement projection ends up wrong by decades.
Do shares protect against inflation?
Over long periods, better than cash — companies can raise prices. Over short periods they often fall when inflation spikes, because rates rise with it. The protection is real but slow.
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Sources
This calculator does arithmetic on the figures you enter. It does not account for tax, fees, or your personal circumstances.
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