Real Rate of Return Calculator
Convert a nominal return into a real one using the exact Fisher equation rather than simple subtraction, then apply tax to see what actually remains in purchasing power.
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Subtracting inflation is an approximation
The common shortcut is to subtract inflation from the nominal return: seven percent nominal less three percent inflation gives four percent real. The exact relationship, the Fisher equation, divides rather than subtracts, and gives 3.88 percent. The gap looks trivial and is not, because it compounds: over thirty years the approximation overstates the real outcome by several percent of the final value, and the error grows with both rates. In high inflation environments the shortcut becomes seriously misleading.
Tax comes before inflation, not after
The order of operations matters and is frequently got wrong. Tax is levied on the nominal return, including the portion that merely compensates for inflation. An investor earning seven percent nominal with three percent inflation and a thirty percent tax rate keeps 4.9 percent nominal, which after inflation is 1.84 percent real. Nearly three quarters of the real return has gone, and a large part of the tax was charged on gains that never existed in purchasing power terms. This is the arithmetic behind the observation that taxing nominal returns is a tax on inflation.
Cash usually loses in real terms
Running the calculation on a savings account is instructive. A deposit paying four percent with inflation at three and a half and tax at twenty percent produces a real after tax return of negative 0.3 percent: the balance grows and buys less each year. That is the normal state of affairs for cash, and it is why cash is a liquidity instrument rather than an investment.
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Frequently Asked Questions
What is the exact formula?
Real return equals one plus the nominal return divided by one plus inflation, minus one. Subtracting inflation is a first order approximation that is close at low rates and increasingly wrong as either rate rises.
Should tax be applied before or after inflation?
Before. Tax is charged on the nominal gain, including the part that only compensates for inflation, so the correct sequence is nominal return, then tax, then deflate by inflation. Doing it the other way understates the tax burden.
Why does tax hurt more when inflation is high?
Because you are taxed on nominal gains. With 2 percent real growth and 8 percent inflation, a 10 percent nominal return is taxed in full even though only a fifth of it is real. High inflation therefore raises the effective tax rate on real returns sharply.
What real return should I expect long term?
Broad equity markets have historically produced roughly 5 to 7 percent real over long periods, government bonds 1 to 2 percent, and cash close to zero or negative after tax. Any projection above those ranges needs a reason.
Does this apply to a salary increase?
The same arithmetic does. A 4 percent raise with 5 percent inflation is a real pay cut of about 0.95 percent, and the tax on the increase makes it worse. The calculator works for any nominal growth rate.
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How to Use
Enter a nominal return, inflation rate and tax rate to see the real after tax return.
Disclaimer: This tool is provided "as is" without warranty of any kind. Results are for educational and utility purposes.
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