1. What is Real Rate of Return?

The Real Rate of Return measures the percentage return on an investment after adjusting for inflation. It shows the true increase in purchasing power from an investment.

2. How Does the Calculator Work?

The calculator uses the simple real return formula:

Where:

• Stock Return — Nominal percentage return from your investment
• Inflation Rate — Percentage increase in consumer prices during the period

Explanation: This calculation shows what your investment actually earned after accounting for the erosion of purchasing power caused by inflation.

3. Importance of Real Return Calculation

Details: Understanding real returns is crucial for long-term financial planning. A positive real return means your purchasing power increased, while a negative real return means you lost purchasing power despite nominal gains.

4. Using the Calculator

Tips: Enter both values as percentages (e.g., for 5%, enter 5). The calculator will show the inflation-adjusted return.

5. Frequently Asked Questions (FAQ)

Q1: Why calculate real returns instead of just looking at nominal returns?
A: Nominal returns don't account for inflation, which can give a misleading picture of your actual wealth growth.

Q2: What's a good real rate of return?
A: Historically, stocks have averaged about 6-7% real return annually, though this varies by period and market.

Q3: Does this calculation account for taxes?
A: No, this is pre-tax real return. For after-tax real return, you'd need to subtract your tax rate as well.

Q4: Can real returns be negative?
A: Yes, when inflation exceeds your investment return, your real return is negative even if your nominal return is positive.

Q5: How often should I calculate real returns?
A: For long-term investors, annual calculation is sufficient. More frequent calculations may be needed during periods of high inflation.