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What Is Real Rate of Return? Inflation-Adjusted Example

Real rate of return measures how much an investment’s purchasing power changes after adjusting its nominal return for inflation over the same period.

Also called: Inflation-adjusted return; Real return.

How it works

Nominal return describes the change in money value. Real return asks how much more or less that money can buy. A positive nominal return can still mean a loss of purchasing power when prices rise faster. An expected real return uses assumed inflation; a realized real return uses inflation measured over the investment period.

Real return = (1 + nominal return) / (1 + inflation rate) − 1

Use decimal rates covering the same period. Subtracting inflation from nominal return is a convenient approximation, not the exact calculation.

An 8% return with 3% inflation

An investment of $1,000 earns a hypothetical 8% over one year, while the price level rises 3%.

  1. Nominal ending value: $1,000 × 1.08 = $1,080.
  2. In starting-year purchasing power: $1,080 / 1.03 ≈ $1,048.54.
  3. Real return: 1.08 / 1.03 − 1 ≈ 4.8544%.

Purchasing power rises about 4.85%, rather than the 5% given by simple subtraction.

One year; the return and inflation rate cover the same dates. This example excludes taxes and fees.

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After inflation does not automatically mean after tax

State whether the nominal return includes fees and taxes before comparing real returns. A broad price index also measures an average basket, so your own spending costs may change differently. Future inflation and returns are assumptions, not known outcomes.

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Sources and checks

Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.

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