What is a good real return?

Historically, US stocks have returned about 7% real (after inflation). Bonds return about 2-3% real. A diversified portfolio targeting 5-6% real return is reasonable for long-term planning. Anything consistently above 7% real is exceptional. If someone promises 15% "guaranteed" returns, be very skeptical.

Should I use real or nominal returns for planning?

For retirement planning, real returns are better — they automatically account for inflation and give you a true picture of future purchasing power. For shorter-term goals (under 5 years), nominal returns are fine since inflation has less impact. Use real returns for the "big picture" and nominal for specific dollar targets.

Do savings accounts earn a real return?

Barely, if at all. With high-yield savings at 4.5% and inflation at 3%, the real return is about 1.5%. With traditional savings at 0.5%, the real return is -2.5% — you're losing purchasing power. This is why keeping large sums in savings accounts long-term is actually a slow loss of wealth.

Real vs Nominal Returns — What's the Difference?

Nominal return is the raw percentage gain; real return adjusts for inflation to show actual purchasing power growth.

Nominal return is the headline number — the percentage your investment grew before accounting for inflation. Real return is the inflation-adjusted measure of how much actual purchasing power your investment gained. If your portfolio grew from $100,000 to $110,000, your nominal return is 10%. But if inflation was 4% that year, your real return (using the Fisher equation) is approximately (1.10 / 1.04) − 1 = 5.77%. The approximate shortcut — nominal return minus inflation rate = real return — gives 6%, close enough for most planning purposes. Real return represents the increase in what you can actually buy with your money.

This distinction is critical because nominal returns can be deeply misleading about actual wealth creation. During the 1970s, US stocks returned about 5.9% nominally per year, but inflation averaged 7.4%, producing a negative real return of approximately -1.4% annually. Investors who watched their statements grow felt they were accumulating wealth, but their purchasing power was quietly declining. Conversely, in the 2010s, stocks returned about 13.6% nominally with only 1.8% inflation, producing an exceptional 11.6% real return per year — genuine, rapid wealth creation in terms of purchasing power.

For long-term planning (especially retirement), always think in real terms. The historical real return of US equities is approximately 7% annually since 1926 (calculated as ~10% nominal minus ~3% average inflation). Long-term US government bonds return about 1-2% real. Cash returns approximately 0% real over long periods (barely keeping pace with inflation). When planning retirement income, using real returns automatically accounts for rising living costs, allowing you to model whether a portfolio sustains real spending power — not just nominal dollar amounts that feel increasingly worth less.

The Fisher equation: calculating real returns precisely. The approximate method (nominal − inflation) understates the correct answer when rates are high. The precise Fisher equation: Real Return = [(1 + Nominal Return) / (1 + Inflation Rate)] − 1. Examples: At 10% nominal, 3% inflation: Real = (1.10/1.03) − 1 = 6.8% (approximate: 7%). At 15% nominal, 8% inflation: Real = (1.15/1.08) − 1 = 6.5% (approximate: 7%). The approximation error grows with the magnitude of both rates — use the full Fisher equation for any rate above 5-6% for accuracy in financial modeling.

Inflation-adjusted returns by asset class: what the historical record shows. Based on US data from 1926-2023: Large-cap US stocks: ~10.1% nominal, ~6.9% real. Small-cap US stocks: ~11.8% nominal, ~8.6% real. Long-term US government bonds: ~5.4% nominal, ~2.3% real. 3-month Treasury bills: ~3.3% nominal, ~0.3% real. Gold: ~5.0% nominal, ~1.8% real. These figures show that only equities have historically provided substantial real (purchasing power-growing) returns over long periods. Bonds and cash meaningfully lag inflation over very long horizons, though they provide important volatility reduction and shorter-term stability.

Real vs. nominal returns in the context of bonds and fixed income. Fixed income (bonds, CDs, savings accounts) is particularly susceptible to inflation risk because the payments are contractually fixed in nominal terms. A 10-year Treasury bond locked in at 2% yields a real return of -1% if inflation averages 3% over the life of the bond — the investor loses purchasing power while feeling secured by guaranteed nominal payments. This is why TIPS (Treasury Inflation-Protected Securities) were created: their principal adjusts with CPI, ensuring a specified real yield above inflation regardless of inflation outcome. In 2022, when inflation surged, holding regular bonds was painful; TIPS holders saw their principal grow with inflation, protecting real wealth.

Real returns and retirement planning: the most common mistake. A frequent error in retirement planning is assuming that a portfolio earning 6-7% annually will comfortably fund retirement — without adjusting for inflation. If you accumulate $1,000,000 and plan to withdraw $50,000 annually (5% withdrawal rate), the nominal portfolio might grow initially if returns exceed withdrawals. But if inflation is 3% and your spending must rise 3% annually to maintain lifestyle, real spending power erodes. The sustainable real withdrawal rate from research (especially the Trinity Study) is approximately 3-4% — accounting for the fact that both withdrawals AND the required portfolio size must grow with inflation for a retirement to truly be "self-funded" rather than gradually diminishing in purchasing power.

Real vs Nominal Return

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