1. What is Real Rate of Return?

The real rate of return adjusts the nominal return for inflation, showing the actual purchasing power of your investment gains. It's crucial for retirement planning to understand how much your money will truly grow over time.

2. How Does the Calculator Work?

The calculator uses the simple real return formula:

Where:

• Nominal Return — The stated return on your investment (as a decimal)
• Inflation Rate — The expected inflation rate (as a decimal)

Explanation: This calculation shows what your investment is actually earning after accounting for the eroding effects of inflation.

3. Importance for Retirement Planning

Details: Understanding real returns helps ensure your retirement savings maintain their purchasing power. Many investors focus only on nominal returns and underestimate inflation's impact over decades.

4. Using the Calculator

Tips: Enter expected nominal returns (e.g., 0.07 for 7%) and long-term inflation estimates (e.g., 0.03 for 3%). Use long-term averages for more accurate retirement planning.

5. Frequently Asked Questions (FAQ)

Q1: What's a good real rate of return for retirement?
A: Historically, stocks have delivered 6-7% real returns. Aim for at least 3-4% real return in retirement portfolios.

Q2: How does compounding affect real returns?
A: Compounding works on real returns. $100 growing at 5% nominal with 2% inflation becomes $163 in real terms after 20 years, not $265.

Q3: Should I use current or historical inflation?
A: For long-term planning, use the long-term average (about 3% in the US). For short-term, current rates may be more relevant.

Q4: Are taxes considered in real returns?
A: No, this is pre-tax real return. For after-tax real return, you'd need to account for tax rates on investment gains.

Q5: How does this apply to bond investments?
A: Particularly important for bonds, as nominal yields may barely outpace inflation, resulting in minimal real returns.