The Fisher Equation
The precise formula is: Real Return = (1 + Nominal) ÷ (1 + Inflation) − 1. The shortcut (Nominal − Inflation) overstates real returns when rates are high. At 10% nominal and 5% inflation, the shortcut gives 5% while the Fisher equation gives 4.76%.
How to Use This Calculator
Enter your nominal return rate, expected inflation rate, initial investment, and time horizon. The calculator shows your real return rate, nominal final value, inflation-adjusted purchasing power in today’s dollars, and the total purchasing power lost to inflation.
Why Real Returns Matter
A 10% nominal return with 8% inflation grows your purchasing power by only 1.85% — not 10%. Over 20 years at 10% nominal and 3% inflation, $10,000 grows to $67,275 nominally, but only $37,280 in today’s dollars.
Historical U.S. Real Returns
U.S. stocks (S&P 500) have averaged ~7% real returns over the long run. Bonds average 2–3% real. Cash and savings accounts regularly produce negative real returns during high-inflation periods.
Frequently Asked Questions
Why do real returns matter?
Real returns measure actual purchasing power growth. A 10% return with 8% inflation only gives 1.85% more real purchasing power — not 10%.
What is a good real return?
U.S. stocks have historically averaged ~7% real returns. Anything above 4–5% real is strong. Bonds average 2–3%. Cash often produces negative real returns in high-inflation environments.
What is the difference between the Fisher equation and the approximation?
The approximation (Nominal − Inflation) overstates real returns when both numbers are large. At 10% nominal and 5% inflation, the approximation gives 5% while the exact Fisher equation gives 4.76%.