Real rate of return calculator

Purchasing-power return after inflation, using (1 + nominal) ÷ (1 + inflation) − 1. Subtracting is close at low rates and wrong when inflation is high.

The calculator

Real return3.88%
Naive subtraction4.00%

(1 + 7.0%) ÷ (1 + 3.0%) − 1 = 3.88%. Subtracting would have said 4.00%.

Why not subtract

A 50% nominal gain with 50% inflation is not a 0% real gain — it is a 0% real return only under the Fisher identity, and a −25% real loss if you think in prices of a $100 basket that became $150. At 3% the two methods almost agree. At 1970s inflation they do not. The safe withdrawal rate calculator works in real terms for that reason.

Assumptions

One period. No compounding layer beyond the identity. No taxes.

Frequently asked questions

How do you calculate real rate of return?
Divide one plus the nominal return by one plus inflation, then subtract one. Subtracting 3% from 7% is close at low rates and wrong when inflation is high.
Why does the safe withdrawal rate use real terms?
Because the spend is in today’s dollars. Mixing a nominal return with a real spend silently inflates the plan.
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