Glossary
Real return
Definition
A real return is the return after inflation, roughly the nominal return minus the inflation rate. A 5% return with 3% inflation is about a 2% real return. After-tax real returns on cash are often near zero.
How real return works
Real returns keep projections in today's dollars, which makes them easier to interpret.
Taxes reduce real returns further in taxable accounts.
Why it matters to a firm
Using real returns keeps retirement plans honest.
Questions about real return
How is real return calculated?
Approximately nominal return minus inflation.
Why use it?
To measure purchasing power.
Can it be negative?
Yes.
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Related terms: Compound interest
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