Real vs. nominal

Explanation

Nominal means “in the dollars of the day.” A 7% nominal return means your balance grew 7%. A $1,000,000 balance in 2050 is a nominal figure.

Real means “adjusted for inflation.” A real return tells you how much your buying power grew. A real balance, also called “today’s dollars,” tells you what a future amount would buy at today’s prices.

A quick approximation is real return ≈ nominal return − inflation. The exact version divides instead of subtracts: (1 + nominal) ÷ (1 + inflation) − 1. The gap is small at low rates but grows when inflation is high.

Why it matters: long-range nominal numbers can look huge and still not cover your costs. Many planning rules, including the 4% rule, are built around real returns and inflation-adjusted spending. Taxes generally apply to nominal gains, which means inflation can raise your tax bill even when your real gain is small.

In scenarios, you can switch the display between nominal and today’s dollars. The app does its internal tax math in nominal terms (since brackets and rules work that way) and converts for display.

Example

Your portfolio earns 7% a year and inflation runs 3%.

• Approximate real return: 7% − 3% = 4%
• Exact real return: 1.07 ÷ 1.03 − 1 = 3.88%

$100,000 invested for 30 years:

• Nominal: $100,000 × 1.07^30 = $761,226
• Inflation over 30 years: 1.03^30 = 2.4273
• Real (today’s dollars): $761,226 ÷ 2.4273 = $313,615

Both figures describe the same outcome. The $761,226 is what your statement would show; the $313,615 is what it would buy at today’s prices.