what is the real rate of return 
the real rate of return is the annual percentage of profit earned on an investment adjusted for inflation therefore the real rate of return accurately indicates the actual purchasing power of a given amount of money over time adjusting the nominal return to compensate for inflation allows the investor to determine how much of a nominal return is real return in addition to adjusting for inflation investors also must consider the impact of other factors such as taxes and investing fees to calculate real returns on their money or to choose among various investing options understanding real rate of returnthe real rate of return is calculated by subtracting the inflation rate from the nominal interest rate 1examples of real rate of returnassume a bond pays an interest rate of 5 per year if the inflation rate is currently 3 per year then the real return on your savings is only 2 in other words even though the nominal rate of return on your savings is 5 the real rate of return is only 2 which means the real value of your savings increases by only 2 in a year considered another way assume you have saved 10 000 to buy a car but decide to invest the money for a year before buying to ensure that you have a small cash cushion left over after getting the car earning 5 interest you have 10 500 after 12 months however because prices increased by 3 during the same period due to inflation the same car now costs 10 300 consequently the amount of money that remains after you buy the car which represents your increase in purchasing power is 200 or 2 of your initial investment this is your real rate of return as it represents the amount that you gained after accounting for the effects of inflation real rate of return vs nominal rate of returninterest rates can be expressed in two ways as nominal rates or as real rates the difference is that nominal rates are not adjusted for inflation while real rates are 2 as a result nominal rates are almost always higher except during those rare periods when deflation or negative inflation takes hold in the late 1970s and early 1980s the profits from double digit interest rates were eaten up by the effects of double digit inflation an example of the potential gap between nominal and real rates of return occurred in the late 1970s and early 1980s double digit nominal interest rates on savings accounts were commonplace but so was double digit inflation prices increased by 11 25 in 1979 and 13 55 in 1980 34 therefore real rates of return were significantly lower than their nominal rate counterparts so should an investor rely on the nominal rate or the real rate real rates give an accurate historical picture of how an investment performed but the nominal rates are what you ll see advertised on an investment product the problem with real rate of return is that you don t know what it is until it has already happened that is inflation for any given period is a trailing indicator which can only be calculated after the relevant period has ended in addition the real rate of return isn t entirely accurate until it also accounts for other costs such as taxes and investing fees 