What is your return actually worth?
Nominal return minus inflation is the wrong sum. See the exact figure, and how far off the shortcut version really is.
The rate as usually quoted — before inflation is taken out.
Used to show the growth in nominal and real terms below.
More options(3)
Deducted from the nominal return before inflation is applied.
At 7% nominal and 2% inflation
4.4%
The return that actually matters — after inflation eats into it — is 4.4%, not the 5% you get from subtracting 2% from 7%. That naive subtraction is off by 0.6%, and it is always wrong in the same direction: it makes the real return look bigger than it is.
- Real return
- 4.4%
- Naive subtraction
- 5%
- Gap between them
- 0.6%
The solid line is the account balance — what a statement would show. In today's purchasing power it is worth $23,713 after 20 years of 2% inflation — the number that actually describes what the money can buy.
If returns average…
Nobody knows which of these happens
| Assumption | Real return |
|---|---|
| 4% a year — cautious | 1.5% |
| 7% a year — middle | 4.4% |
| 10% a year — optimistic | 7.4% |
Markets do not return the same amount every year. The band shows the same plan under three different assumptions, so you can see how much the answer depends on a number nobody knows.
Why subtraction gets it wrong
Subtracting 2% from 7% treats inflation as though it comes off the amount you started with. It actually comes off the amount you end up with, after growth has already happened — so the correct form divides rather than subtracts: (1 + 6.5%) ÷ (1 + 2%) − 1 = 4.41%. The gap between that and the naive 5% grows with both the return and the inflation rate, and it is never in the saver's favour.
Two different questions, easily confused
"What did my investment return?" and "what did my investment return, once I can only spend it on things that also got more expensive?" sound like the same question with slightly more words attached. They are not, and the gap between their answers is the entire subject of this page. The first is the nominal return — the number a statement or a fund factsheet quotes. The second is the real return, and it is always the smaller of the two whenever prices are rising.
Most people close the gap by subtracting: 7% return, 2% inflation, so the real return must be about 5%. It is close enough to feel right, which is exactly why it is worth being precise about how it is wrong.
Why subtraction is the wrong operation
Inflation does not take a bite out of the money you started with — it takes a bite out of the money you end up with, after a year of growth has already happened. Growth and inflation both compound, so the correct way to combine them is to divide, not subtract:
real return = (1 + nominal) ÷ (1 + inflation) − 1
At 7% nominal and 2% inflation that gives 4.90%, not the 5.00% naive subtraction produces. Ten basis points sounds trivial for a single year. It is not trivial as a habit: the same shortcut is what sits, uncorrected, behind most "what will my money be worth" tools online, and it always errs the same way — toward a more flattering number than the one a saver will actually experience.
This is sometimes called the exact Fisher equation, after the economist who formalised it, as distinct from the approximate version (nominal − inflation) that gets taught as a shortcut.
The gap widens with the numbers involved
The size of the error is not fixed — it grows with both the nominal rate and the inflation rate, because it comes from the nominal-times-inflation cross term the subtraction drops entirely. At low, calm rates the naive version is a reasonable stand-in. In a higher-inflation stretch, or for a higher-returning assumption, treating it as exact starts to matter. The calculator above recomputes the gap live for whatever rates are entered, rather than quoting a single example.
What this feeds into
The real return is not just a number to note and move past — it is the correct rate to use anywhere a target is stated in today's money. The Coast FIRE calculator discounts at exactly this figure, for exactly this reason: a retirement target set from today's spending has to be reached in today's purchasing power, and using the nominal rate there would understate how much is really needed.
Common questions
Is the naive subtraction ever good enough?
Does a negative real return mean I am losing money?
Should fees be taken out before or after the inflation adjustment?
What inflation rate should I use?
Not advice. This tool applies arithmetic to assumptions you entered. It does not know your circumstances, your tax position or your goals, and it is not a recommendation to buy, sell or hold anything. Past returns do not predict future ones, and no figure here is a forecast.