Nominal vs Real Returns

Background

Nominal return is the headline percentage you see, such as 9% per year. Real return adjusts that number for inflation to show how much your purchasing power truly grows.

Explanation

If your FD yields 7% while inflation is 6%, your real return before tax is only about 1% and may be negative after tax. For retirement, you must plan in real terms so that your lifestyle does not silently erode.

Example

An equity-heavy portfolio earning 11% when inflation is 6% delivers a 5% real return, which can support a 3–4% withdrawal rate. A pure FD portfolio at 7% in the same environment barely preserves purchasing power.

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