← Back to Glossary
Real Return
Definition
Real return is the annual investment return adjusted for inflation, showing the actual increase in purchasing power.
Explanation
Real return = Nominal return - Inflation rate. For example, if a stock portfolio returns 10% and inflation is 3%, the real return is about 7%. Real return is what matters for growing purchasing power. Bonds and cash often have low or negative real returns after inflation.
Understanding real returns helps set realistic expectations for investment growth and retirement planning.
Example
A savings account earning 4.5% interest with 3% inflation provides a real return of only 1.5% after inflation.