Real Return Calculator

The number almost nobody quotes

Investment returns are almost always quoted nominally, before inflation, fees and tax. That figure is not wrong, but it does not describe anything you can spend. What you can spend is what is left after prices have risen, your provider has taken its share, and the tax authority has taken its share.

The gap is larger than most people expect. A headline return can comfortably halve by the time all three drags are applied, and the effect compounds, so the difference over a couple of decades is not a rounding error.

How the drags are applied here

The fee comes off first, because it is charged on the balance regardless of what the market did. Tax is then applied to what remains, treated as an annual drag on gains rather than a one-off charge at sale. Finally the result is deflated by inflation using the standard relationship between nominal and real rates rather than simple subtraction.

Simple subtraction is close enough at low rates and increasingly wrong as rates rise, which is why the proper form is used here. At typical inputs the two methods differ only slightly, but the difference grows with inflation.

On the tax input specifically

Tax treatment varies enormously between countries and between account types within the same country. Tax-sheltered accounts may make the correct input zero. Some jurisdictions tax realised gains only, which makes an annual drag a poor model. Others tax deemed returns on wealth regardless of what you actually made.

Treat the tax field as a rough drag rather than a calculation of what you owe, and set it to zero if your investments are genuinely sheltered.

Common questions

What is a realistic real return for equities?

Long-run history for globally diversified equities is usually cited around 5% real, before fees and tax. That is an average across long periods containing decades that were far better and far worse.

Why not just subtract inflation from the return?

Because rates compound rather than add. Subtraction is a good approximation at low rates and drifts as inflation rises. This calculator uses the proper relationship, which is why the answer may differ slightly from a back-of-envelope figure.

Should I include tax if I invest in a sheltered account?

No. Set tax to zero. That is one of the clearest demonstrations of what a tax wrapper is worth, and it is worth running both ways to see the difference.

Does a real return of 3% mean I am doing badly?

Not at all. Three percent real, sustained, doubles your purchasing power in roughly 24 years. The point of the calculator is that the headline number overstates it, not that the underlying result is poor.