3% inflation = $0.74 in 10 yrs
Real vs. nominal returns: the number that actually matters
Real return equals nominal return minus the inflation rate — a 7% nominal return at 3% inflation is only 3.9% real. Always compare investments using real returns, especially over long horizons. TIPS (Treasury Inflation-Protected Securities) and I-bonds directly hedge against inflation by adjusting principal or interest with the CPI.
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Try calculatorKey takeaways
04 · ideas- Real return = nominal return − inflation rate
- At 3% inflation, $100 today is worth $74 in 10 years
- Always compare investments using real returns
- TIPS and I-bonds directly protect against inflation
When an investment earns 7% and inflation runs at 3%, your real return is roughly 4% — meaning you can actually buy about 4% more stuff with your money.
Why it matters:- A savings account paying 0.5% with 3% inflation has a real return of -2.5% — you're losing purchasing power
- A bond paying 4% with 3% inflation earns a real return of ~1%
- Stocks averaging 10% nominal with 3% inflation earn a real return of ~7%
Always think in real terms when comparing long-term investments or planning retirement.