---
title: Real vs nominal return — what it means and why it matters | Allocate AI
description: A nominal return is the headline growth figure; a real return subtracts inflation to show how much your buying power actually grew.
canonical: https://allocateai.io/glossary/real-vs-nominal-return
site: Allocate AI — https://allocateai.io
---

# Real vs nominal return

A nominal return is the headline growth figure; a real return subtracts inflation to show how much your buying power actually grew.

A nominal return is the number a statement shows: your account went from $100,000 to $108,000, an 8% return. A real return strips out inflation to show what that growth means in terms of what you can buy. If inflation was 3% that year, the real return was roughly 5%. The account holds more dollars, but each is worth less.

The rough formula is nominal minus inflation. The exact one is (1 + nominal) divided by (1 + inflation) minus 1, which for 8% and 3% gives 4.85%. For quick planning the subtraction is close enough.

The distinction matters most over long periods. The US stock market's long-run nominal return is around 10% a year; its real return is closer to 7%. Bonds have averaged around 5% nominal and 2% real. Cash has averaged roughly 0% real, meaning savings accounts have historically just kept pace with prices, not beaten them.

When projecting a retirement balance, use one basis or the other consistently. Growing today's contributions at a 7% real return gives an answer in today's dollars, which is easier to judge. Growing them at 10% nominal gives a bigger number that must then be deflated to mean anything.

The common mistake is mixing them: projecting at a nominal rate and then comparing the result to today's cost of living. That makes a future balance look about twice as comfortable as it will be.

[Try the Time Value of Money Calculator →](https://allocateai.io/calculators/time-value)

## Related terms

- [Inflation](https://allocateai.io/glossary/inflation) — The general rise in prices over time, which means each dollar buys a little less every year and savings must grow just to keep their value.
- [Compound interest](https://allocateai.io/glossary/compound-interest) — Growth on top of growth: earnings are added to the balance, and then those earnings earn too, so money grows faster the longer it is left alone.
- [Time value of money](https://allocateai.io/glossary/time-value-of-money) — The idea that a dollar today is worth more than a dollar later, because today's dollar can be invested and grow in the meantime.
- [Index fund](https://allocateai.io/glossary/index-fund) — A mutual fund or ETF that holds every stock in a market index like the S&P 500, so you own a slice of the whole market at very low cost.

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Allocate AI is a budgeting and financial-planning app: link your accounts, say what you want in plain words, and it writes the plan and stages every change for your approval. Read more at https://allocateai.io or see all pages in https://allocateai.io/llms.txt.