Real Return & Inflation-Adjusted Investment Calculator

Real Returns and Inflation Guide

What's the difference between Real and Nominal Returns?

Nominal return: the stated percentage return before inflation adjustment. Real return: the Fisher equation: (1 + real) = (1 + nominal) / (1 + inflation). Simplified: real return ≈ nominal − inflation. Example: savings account at 4.5% with 3.5% inflation: real return ≈ 1%. You are barely keeping up with inflation. £10,000 grows to £14,500 nominally but the real purchasing power increase is only about £1,000 in today's money. The real return is the only figure that tells you whether you are actual

What should I know about Inflation and Cash Savings?

Cash held without investing is destroyed by inflation at the full inflation rate. £10,000 in cash at 3% inflation for 20 years: real value = £10,000 / 1.03²⁰ = £5,537. You still have £10,000 but can only buy what £5,537 would buy today. This is why saving in cash alone is a wealth-destroying strategy over long periods. The Bank of England's 2% inflation target means £1 today should be worth approximately 67p in 20 years — this is considered a healthy, stable economy. Hyperinflation (Zimbabwe 2008, Venezuela 2018) shows the extreme end of what happens when this control is lost — savings can become worthless within months.

What should I know about Long-Run Real Returns by Asset Class?

Historical real returns (UK, long-run averages after inflation): equities (UK stock market): approximately 5-7% real per year. Global equities: 5-6% real. UK residential property: 2-3% real (including rental income, excluding costs). Index-linked gilts: 0-1% real. Cash/savings accounts: 0-1% real (sometimes negative in high inflation periods). This is why long-term investors allocate heavily to equities — the equity risk premium (return above inflation) has historically been substantial. Short-term, cash tends to preserve capital better during volatile periods, but over decades-long horizons it reliably underperforms equities after inflation.

What do I need to know about Sequence of Returns Risk?

The order of returns matters for investors drawing down funds in retirement. Two investors both average 5% real return but one experiences losses early, one late. The investor suffering early losses has a much worse outcome because losses early compound the damage — there is less capital remaining to benefit from subsequent gains. This sequence of returns risk explains why a 100% equity portfolio can be dangerous in the years immediately before and after retirement. The sequence risk is also why many retirement strategies recommend holding 1-3 years of expenses in cash or bonds, so withdrawals during a market downturn don't force selling equities at a loss.