What is the real rate of return formula?

Real rate = (1 + nominal rate) ÷ (1 + inflation rate) − 1.

Why not just subtract inflation?

Subtracting is an approximation. It overstates the real return, noticeably so when rates are high.

Can the real return be negative?

Yes, whenever inflation is higher than the nominal return.

What is the Fisher equation?

(1 + nominal) = (1 + real) × (1 + inflation). It links nominal rates, real rates and inflation.

Real Rate of Return Formula (Fisher)

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Real Rate of Return Calculator (Fisher Equation)

The real rate of return is what an investment earns after inflation, in other words the growth of your purchasing power. The exact relationship, known as the Fisher equation, is 1 + real = (1 + nominal) ÷ (1 + inflation). Rearranged, the real rate is (1 + nominal) ÷ (1 + inflation) − 1.

Formula

r_real = 1 + r_nominal1 + inflation − 1 approximation: r_real ≈ r_nominal − inflation

Where

r_real: return after inflation (growth in purchasing power)
r_nominal: stated return, before inflation
inflation: inflation rate over the same period

Calculator

Nominal return (%)

Inflation rate (%)

Result and step-by-step solution

Real rate of return

4.8544%

The quick approximation (5%) overstates it by 0.1456%.

Growth factors
1 + 0.08 = 1.08; 1 + 0.03 = 1.03
Divide and subtract 1
1.081.03 − 1 = 0.04854369 = 4.8544%

How to use the formula

Many people use the shortcut real ≈ nominal − inflation. It is close when both rates are low, but it always overstates the real return when inflation is positive, and the error grows with the rates. At 8% nominal and 3% inflation the shortcut says 5%; the exact real return is 4.85%. In a high-inflation economy, say 30% nominal and 25% inflation, the shortcut says 5% but the true figure is only 4%.

Use the real rate to judge whether savings are keeping up with prices, to compare returns across countries or decades, and to discount inflation-adjusted cash flows. For savings accounts, remember that tax is charged on the nominal return, so the after-tax real return can be negative even when the nominal rate looks healthy. For an annual equivalent of a quoted rate, see the effective annual rate.

Frequently asked questions

What is the real rate of return formula?: Real rate = (1 + nominal rate) ÷ (1 + inflation rate) − 1.
Why not just subtract inflation?: Subtracting is an approximation. It overstates the real return, noticeably so when rates are high.
Can the real return be negative?: Yes, whenever inflation is higher than the nominal return.
What is the Fisher equation?: (1 + nominal) = (1 + real) × (1 + inflation). It links nominal rates, real rates and inflation.

Last reviewed: September 26, 2026. Calculations run in your browser and were checked against numpy-financial, SciPy and published spreadsheet examples.