A return only matters for what it can buy. Convert a nominal return into a real, inflation-adjusted return, account for taxes, and see how inflation erodes purchasing power over time.
How it works
Convert a nominal return into its real, inflation-adjusted equivalent, include taxes, and see how inflation erodes purchasing power over time.
Real return = (1 + Nominal) ÷ (1 + Inflation) − 1 (Fisher equation)
After-tax real return = (1 + Nominal × (1 − Tax)) ÷ (1 + Inflation) − 1
Real value = Nominal value ÷ (1 + Inflation)^Years
Purchasing power = Amount ÷ (1 + Inflation)^YearsCommon uses
- Evaluating investments and savings in real terms
- Setting long-term financial goals
- Economics and finance coursework
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Nominal annual return | 7% |
| Annual inflation | 3% |
| Tax rate on returns (optional) | 0% |
| Amount | $100,000 |
| Years | 20 |
| Real return | 3.88% |
| Inflation-adjusted growth multiple | 2.14× |
| Simple approximation | 4.00% |
| Future value in 20 years | $386,968 |
| Future value in today’s dollars | $214,255 |
| Purchasing power of today’s amount | $55,368 |
Prices double in about 23.45 years at 3.0% inflation. Taxes apply to the full nominal return, so inflation raises the effective tax rate on real returns.
Interpreting the results
- Compare investments and set long-term goals in real terms, since nominal growth overstates what money will buy.
- The simple approximation (nominal minus inflation) overstates the real return when rates are high.
- Cash and bonds yielding less than inflation lose purchasing power even when the balance grows.
Frequently asked questions
How is the real rate of return calculated?
The Fisher equation gives the exact real return: (1 + nominal return) divided by (1 + inflation), minus 1. A 7% nominal return with 3% inflation is a real return of about 3.88%.
Why not just subtract inflation from the nominal return?
Subtracting is a convenient approximation, but it overstates the real return, and the error grows when rates are high. The Fisher equation is exact.
How do taxes affect the real return?
Taxes apply to the full nominal return, including the part that only compensates for inflation. As a result, inflation raises the effective tax rate on real returns, and after-tax real returns can turn negative even when nominal returns are positive.
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