Real Return
Real return is an investment's return after subtracting the effect of inflation. It reflects how much purchasing power an investment actually gained, not just how much its dollar value grew.
Why it matters
- A 6% nominal return during 3% inflation is really only about a 3% real return in purchasing-power terms.
- Ignoring inflation can make long-term projections look more comfortable than they actually are.
- Retirement and long-horizon planning should generally be done in real (inflation-adjusted) terms.
Simple example
- If an investment returns 7% in a year and inflation was 3%, the approximate real return is about 4%.
- Cash sitting in a low-interest account can have a negative real return during periods of higher inflation, even though the dollar amount doesn't shrink.