Inflation erodes your purchasing power silently. See what your investments are actually worth in today's dollars.
Nominal return is what your brokerage statement shows. Real return is what that money can actually buy. If your portfolio grew 9% but inflation was 3%, you didn't really get richer by 9% — you got richer by about 5.8%. The difference is the silent tax that inflation levies on every investor.
The precise relationship between nominal return, real return, and inflation is given by the Fisher equation (named after economist Irving Fisher):
Many people approximate this as: real ≈ nominal - inflation. That's close enough for back-of-envelope math but slightly inaccurate at higher rates. This calculator uses the exact Fisher equation.
The S&P 500 has returned approximately 10% nominally per year over the long run (1926–present). After inflation averaging roughly 3%, that translates to about 7% real. This 7% real return is the bedrock assumption behind most long-term financial planning.
During the 1970s stagflation era, inflation hit 13.5% — meaning a 10% nominal return was actually a loss in real terms. Understanding real returns helps you avoid the illusion that a rising account balance means growing wealth.
Retirement planning must be done in real terms, not nominal. A $1 million target in 30 years sounds like a lot — but at 3% inflation, that's only worth about $412,000 in today's purchasing power. Plan using today's dollars and real returns; otherwise you're building a false sense of security.
The Purchasing Power Index (PPI) in the table above shows, for each year, how much of the nominal balance retains genuine purchasing power in today's dollars. A PPI of 1.00 means purchasing power is unchanged. Every year, inflation erodes this ratio — which is why holding cash long-term is a guaranteed losing strategy.