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.
Tips
- Use the nominal annual rate and pick the compounding frequency your bank or broker states.
- Small differences in return or fees compound into large differences over decades.
- Run the calculation with a cautious, a central and an optimistic return to see the range of outcomes.
- Past returns do not guarantee future returns – nothing here is investment advice.
Common mistakes to avoid
- Comparing an APR with an APY or effective rate.
- Ignoring inflation, taxes and fees when judging a real return.
- Entering a percentage as a decimal (5 instead of 0.05 is correct here).
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) − 1After tax: nominal × (1 − tax rate) is used in place of the nominal returnApproximation: real ≈ nominal − inflationWorked 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.
What formula does the Real Rate of Return Calculator use?
Real return = (1 + nominal return) ÷ (1 + inflation) − 1.