Strip inflation out of a nominal return to get the real return that actually grows purchasing power.
The exact Fisher relation divides the growth factors rather than subtracting the rates. Subtraction is a decent approximation at low rates but drifts noticeably once inflation is above a few per cent. Only the real return compounds your standard of living; a 8% nominal return with 3% inflation grows purchasing power at 4.85%, not 5%.
Real Rate of Return
Real return = (1 + nominal) ÷ (1 + inflation) − 1
Real return = (1 + nominal) ÷ (1 + inflation) − 1 The exact Fisher relation divides the growth factors rather than subtracting the rates. Subtraction is a decent approximation at low rates but drifts noticeably once inflation is above a few per cent.
Only the real return compounds your standard of living; a 8% nominal return with 3% inflation grows purchasing power at 4.85%, not 5%.
This calculator takes 4 inputs: Nominal annual return, Inflation rate, Holding period, Starting amount. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.