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Real Return Calculator

Calculate the real return of your investment after inflation and taxes. Discover how much you truly gain in purchasing power.

Sources: Investopedia -- Fisher Equation (Real Rate of Return) · Federal Reserve -- Inflation and Real Returns

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How the Real Return Calculator Works

This tool calculates the real return of your investment, meaning how much you actually earn in terms of purchasing power after subtracting taxes and inflation.

The Fisher Formula

To calculate the real return, the Fisher equation is used: Real Return = ((1 + after-tax return) / (1 + inflation)) - 1

This formula is more precise than simple subtraction (return - inflation) because it accounts for the compounding effect of inflation on capital.

Why Real Return Matters

Nominal return can be deceiving. An investment that yields 5% annually looks attractive, but after 26% taxes (net return 3.7%) and 2% inflation, the real return is only about 1.7%. This means that of every $100 in gross return, about $26 goes to taxes, about $37 is eroded by inflation, and only about $37 actually increases your purchasing power.

The Effect of Inflation Over Time

Inflation is a silent enemy. At 2% annually, purchasing power halves in about 35 years. This is why your investments must generate a positive real return: it is not enough to maintain nominal capital; you must grow faster than inflation.

Comparing Real Returns

Typical real returns by asset class (historical estimates, 2% inflation, after taxes): Checking account: about -2%; Savings account 3% gross: about +0.2%; Government bonds 3.5% gross: about +1%; Global equity ETF 7% gross: about +3%.

Frequently Asked Questions

What is the real return?▼
The real return is the return of an investment after inflation and taxes. It represents the actual increase in purchasing power. An investment yielding 5% gross with 2% inflation and 26% taxes has a real return of about 1.6%.
How is the real return calculated?▼
The Fisher equation is used: Real Return = ((1 + net return) / (1 + inflation)) - 1. First calculate the after-tax return, then deflate with the inflation rate. Simply subtracting inflation from the net return is not precise enough.
Why does a checking account lose money?▼
A checking account typically yields 0-0.1% gross. With 2% inflation, the real return is about -2% per year. In 10 years, $10,000 would lose about $1,800 in purchasing power. This is why it is important to invest sums not needed short-term.