How to use the real return calculator
The Real return tool takes three inputs.
- Nominal return per year: an interest rate, a bond yield or an investment’s annual return, as reported.
- Inflation per year: the CPI change over the same period for a past return, or your expectation for a future one.
- Tax rate (optional): the rate charged on the return, such as your income tax rate for interest or your long-term capital gains rate.
You get the exact real return, the shortcut approximation and its error, and the real return after tax. The chart and table show how the same nominal return holds up at other inflation rates.
The Real bond yield tool has two modes. Enter a nominal Treasury yield with your inflation forecast to get the real yield. Or enter a nominal yield and a TIPS yield of the same maturity to get the breakeven inflation rate the market is pricing.
The formulas
Exact: (1 + Nominal yield) ÷ (1 + TIPS yield) − 1
A worked example
An investment returns 7% in a year with 3% inflation. The real return is 3.88%, slightly below the 4.00% you get by subtracting.
With a 15% tax on the return, you keep 5.95% in nominal terms and 2.86% in real terms. The tax took 26.2% of the real return, not 15%.
A Treasury yielding 4.3% with 2.5% expected inflation has a real yield of 1.76%.
When the shortcut breaks down
Subtracting inflation works because the error is tiny at low rates: only 0.12% in the example. It grows with the level of rates. At 12% nominal and 8% inflation, the exact real return is 3.70%, against 4.00% by subtraction. In high-inflation economies, or over many years, use the exact formula.
Why tax hits real returns harder
Tax is charged on the full nominal return, including the part that only compensates for inflation. The tax rate on the real gain is therefore higher than your stated rate, and the gap widens as inflation rises relative to the return.
A bond yielding 4% with 3% inflation, taxed at 24%, earns a real return of 0.97% before tax but only 0.04% after tax: 96.0% of the real gain goes to tax. This is a strong argument for holding interest-paying assets in tax-advantaged accounts where possible, and for looking at after-tax real returns when comparing savings options.
Real yields, TIPS and breakeven inflation
A nominal Treasury pays a fixed yield, so its real return depends on inflation you only learn later. Treasury Inflation-Protected Securities (TIPS) do the reverse: their principal is adjusted with the CPI-U, so the quoted yield is a real yield that holders to maturity effectively lock in.
The difference between the two yields is breakeven inflation. With example yields of 4.3% and 1.9%, it is 2.40% (2.36% with the exact formula). If inflation averages more than that, TIPS come out ahead; if less, the nominal bond does. The table in the TIPS mode lays out both outcomes. Breakeven is a market price, not a pure forecast: it also contains an inflation risk premium and reflects the lower liquidity of TIPS.
What this calculator does not include
- Timing of taxes on TIPS. The yearly inflation adjustment to TIPS principal is taxable in the year it occurs, even though you receive it only at maturity.
- The TIPS deflation floor, which repays at least the original principal at maturity.
- Price changes before maturity. Bond yields here assume you hold to maturity.
- Multi-year compounding. Results are yearly rates. For a multi-year history, use the annualized nominal return and annualized inflation for the same period.
- Live yields. The default yields are examples; enter current quotes for the maturity you care about.