Real and nominal returns

A nominal return is the percentage change you see before accounting for inflation. A real return describes how much purchasing power changed after inflation.

A simple example

Suppose an investment grows by 6% while prices rise by 3%. The account has 6% more dollars, but those dollars buy only about 3% more than before. The nominal return is 6%; the real return is roughly 3%.

The exact relationship is multiplicative rather than simple subtraction, but subtraction is often a useful approximation when the percentages are modest.

Why the distinction matters

Retirement plans span decades. A portfolio can grow substantially in dollars while inflation steadily reduces what each dollar can buy. Spending, benefits, taxes, and account balances must therefore use a consistent framework.

If returns are entered as real returns, inflation has already been removed and should not be subtracted a second time. If returns are nominal, the plan must model inflation separately to compare future assets with future costs.

Reading Alpha Retire

Historical Market Data labels its asset-class observations as real returns and displays inflation separately. Other screens may show future amounts in nominal dollars or today’s purchasing power depending on the report and display settings.

When comparing assumptions or outside sources, first check whether the figures are real or nominal. A return that looks lower may simply be stated after inflation, while a higher-looking number may not represent more purchasing-power growth.

Investor.gov defines real return as return after accounting for inflation and taxes; in planning models, always confirm the specific convention being used.