Real Return 101: What Actually Grows Your Purchasing Power

Nominal return is the headline number before inflation. Real return adjusts for inflation’s erosion of purchasing power. In periods of elevated inflation, focusing on real return helps you build a portfolio that preserves and grows what your money can buy.

• Tool: Investment Return Calculator

Nominal vs. Real: The Simple Math (Conceptual)

• Nominal return: your portfolio’s growth before inflation and taxes
• Inflation: annual rise in prices that reduces what each dollar buys
• Real return (approximate): nominal return − inflation (compounding and taxes add nuances)

Example: If your portfolio returns 7% and inflation is 3%, your approximate real return is 4% before taxes. Over a decade, that difference compounds dramatically.

Why Asset Mix Matters for Real Return

• Equities: historically higher nominal returns, but volatile; long‑term growth driver
• Bonds: income and stability; real return depends on yields vs. inflation
• TIPS (Treasury Inflation‑Protected Securities): principal adjusts with CPI; aim to preserve real value
• Cash/HYSA: low volatility; real return can be negative in high inflation even if nominal yield rises

A Practical Portfolio Framework for 2025

1. Define time horizon and risk capacity (ability + willingness)
2. Use a diversified equity core (broad market index funds)
3. Balance bond duration with rate outlook; consider laddered Treasuries
4. Add TIPS or I Bonds for inflation hedging (limits apply)
5. Keep an emergency fund outside the portfolio to avoid forced selling

Related tools: Emergency Fund Calculator and Net Worth Calculator

Sequence of Returns Risk (For Retirees)

When withdrawing from a portfolio, poor early returns can harm sustainability even if long‑term averages look fine. A simple way to reduce the risk:

• Maintain a 1–2 year cash/bond “bucket” for planned withdrawals
• Refill the bucket from equities in good years; rely on bonds/cash in bad years

See: retirement cash‑flow planning ideas in our RMD series: Required Minimum Distribution Table

Taxes and Real Return

• Asset location: place tax‑inefficient assets (bonds/REITs) in tax‑advantaged accounts when possible
• Tax‑loss harvesting: can improve after‑tax real return in taxable accounts
• Long‑term capital gains and qualified dividends often have favorable rates—structure to benefit

Example: Two Investors, Same Nominal Return

• Investor A holds 70/30 stocks/bonds in tax‑advantaged accounts, rebalances annually, adds TIPS
• Investor B holds high‑turnover funds in taxable accounts, keeps large cash balances

Both earn ~7% nominal. After taxes and inflation, Investor A’s real return is higher due to better asset location, lower costs, and inflation hedging.

FAQs

Are TIPS a guaranteed positive real return?

They’re designed to preserve real value before taxes if held to maturity, but market prices fluctuate. Real return also depends on taxes and your purchase yield.

Should I hold more cash during high inflation?

Cash is valuable for liquidity and stability, but excess cash can have negative real returns. Match cash levels to near‑term needs, then invest systematically.

Is international equity exposure useful?

Often yes, for diversification and different inflation/regime exposures. Keep costs low and rebalance.

What to Do Next

• Estimate your real return: Investment Return Calculator
• Build your buffer: Emergency Fund Calculator
• Track progress: Net Worth Calculator