Investing and markets

Real return

The return left after subtracting inflation: what your purchasing power actually gained, rather than what your balance did.

Also called: real returns · inflation-adjusted return

A portfolio that rises 8% in a year with 3% inflation has not made you 8% richer. It has made you roughly 5% richer. That figure, the real return, is the only one you can compare against your future spending, because your future spending rises with inflation too.

Nominal return is what appears on statements and in headlines. Real return is what decides whether you can maintain your standard of living.

If you are projecting long term, pick one of the two coherent methods: project in nominal terms and inflate future spending, or project in real terms and leave spending in today's money. Mixing them is the single most common error in any retirement spreadsheet.