If your savings earn 5% but prices rise 3%, you are only about 1.94% better off in real terms. After tax, real returns on cash savings can easily be negative.
How to use the Real Rate of Return Calculator
- Nominal return
- Inflation rate
- Tax rate on returns
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the nominal return, the inflation rate and, optionally, the tax rate on returns.
Inputs explained
| Field | What to enter |
|---|---|
| Nominal return | In % |
| Inflation rate | In % |
| Tax rate on returns | In % |
What each result means
- Real rate of return = ((1 + [Nominal return]÷100×(1 – [Tax rate on returns]÷100))÷(1 + [Inflation rate]÷100) – 1)×100
- Quick approximation = [Nominal return]×(1 – [Tax rate on returns]÷100) – [Inflation rate]
- After-tax nominal return = [Nominal return]×(1 – [Tax rate on returns]÷100)
Example values
How the main result changes when Nominal return changes and everything else stays at the example values above:
| Nominal return (%) | Real rate of return (%) |
|---|---|
| 3.5 | 0.485 |
| 5.25 | 2.184 |
| 7 | 3.883 |
| 8.75 | 5.583 |
| 10.5 | 7.282 |
| 14 | 10.68 |
Formula
Real return = (1 + nominal return) ÷ (1 + inflation) − 1
After tax: nominal × (1 − tax rate) is used in place of the nominal return
Approximation: real ≈ nominal − inflation
Worked example
Inputs: Nominal return: 7 %; Inflation rate: 3 %; Tax rate on returns: 0 %.
Results: Real rate of return = 3.883 %; Quick approximation = 4 %; After-tax nominal return = 7 %.
Frequently asked questions
What is the real rate of return?
The return after removing the effect of inflation.
Why not just subtract inflation?
That is an approximation; the exact formula divides growth factors.
Can real returns be negative?
Yes, when inflation exceeds your after-tax return.
Guides on this topic
- How to Calculate ROI: Formula, Annualized ROI and Real Examples: The ROI formula in one line, how to annualize it so different holding periods compare fairly, and worked marketing and rental property examples.