Real Return.

The real return is the investment return an investor earns after stripping out the effect of inflation, expressing growth in purchasing power rather than in nominal dollar terms. While a nominal return shows how many more dollars an investor holds at the end of a period, the real return answers the more important question: how much more can those dollars actually buy? The most precise calculation uses the Fisher equation — (1 + nominal return) ÷ (1 + inflation rate) − 1 — though for rough purposes subtracting the inflation rate from the nominal return is a common shorthand. Over long horizons, the difference between real and nominal returns is substantial. U.S. equities have historically delivered nominal returns near 10% annually but real returns closer to 7%, because roughly 3% of that nominal gain was simply keeping pace with rising prices. For retirees drawing down a portfolio, the real return is the critical figure: a 6% nominal return in a 5% inflation environment leaves only 1% in real purchasing power gains, which may be insufficient to sustain withdrawals for decades. Inflation-indexed bonds such as Treasury Inflation-Protected Securities (TIPS) directly target a defined real return by adjusting their principal with the Consumer Price Index. Fixed-income investors who ignore real returns often discover that holding nominal bonds during inflationary periods results in negative real returns — their capital buys less at maturity than it did at purchase.