A nominal return counts money; a real return counts what the money buys. Over 126 years US shares returned about 9.8% a year before inflation and 6.6% after it, and a deposit paying 6.25% against 4% inflation earns about 2.2% in real terms before tax. Planning in real terms changes how big a future number really is.
Every return you are quoted — on a fixed deposit, a fund factsheet, a pension statement — is almost always nominal: it counts how many more units of money there will be. What you care about is the real return: how much more that money can buy. The gap between the two is inflation, and over the length of a working life it is the difference between a figure that sounds comfortable and one that is.
6.6%1
a year after inflation from US shares, 1900–2025
38×1
how far US prices rose over the same 126 years
4%2
India’s inflation target, within a 2–6% band
2%3
the Federal Reserve’s inflation target
The economist Irving Fisher set out the relationship most fully in The Theory of Interest in 1930, and it has not needed changing since4. Growth in what your money buys equals growth in the money divided by growth in prices: (1 + real) = (1 + nominal) ÷ (1 + inflation). A deposit paying 7% a year while prices rise 5% leaves you about 1.9% better off in what you can buy, not 2%: 1.07 ÷ 1.05 is 1.019. Subtracting inflation from the return is a fair shortcut when both are small, and it gets worse as they grow.
Two consequences follow straight away. A return below inflation is a loss, however positive the statement looks. And the same nominal return can be a good result in one country and a poor one in another, because the inflation it has to beat differs: central banks in the US, the euro area, the UK and Japan aim at 2%, while India’s target is 4%3,5,6,7,2.
The longest consistent record is the one Elroy Dimson, Paul Marsh and Mike Staunton keep for UBS. One US dollar put into shares at the start of 1900 had grown to $124,854 by the end of 2025, against $284 in long-term government bonds and $69 in Treasury bills — while prices rose 38-fold1. Those totals work out at about 9.8%, 4.6% and 3.4% a year before inflation. Divided by the rise in prices, they are about 6.6%, 1.6% and 0.5% a year after it1.
US returns a year, 1900–2025, before and after inflation
| Nominal | Real (after inflation) | |
|---|---|---|
| Shares | 9.8% | 6.6% |
| Long-term government bonds | 4.6% | 1.6% |
| Treasury bills | 3.4% | 0.5% |
Read the chart from the right. Cash and bills roughly kept pace with prices for a century, which is what they are for: safety, not growth. Bonds did a little better. Almost all of the long-run growth in buying power came from shares, and even there inflation took a third of the headline. That is why a plan to stop working on your savings has to rest on real returns: the nominal ones overstate what a lifetime of saving buys by a factor that grows every year.
Take a one-to-two-year fixed deposit at State Bank of India, which paid 6.25% in October 20268, against India’s 4% inflation target2. In real terms that is 1.0625 ÷ 1.04, about 2.2% a year. Deposit interest is taxed every year as income, though, and tax is charged on the whole nominal return, not on the real part. A saver taxed at 30% keeps about 4.4% of the 6.25%, and 1.044 ÷ 1.04 leaves a real return of about 0.4%.
| A ₹10 lakh deposit for one year | Before tax | After 30% tax |
|---|---|---|
| Interest at 6.25% | ₹62,500 | ₹43,750 |
| Lost to 4% inflation (what the year-end balance no longer buys) | about ₹40,900 | about ₹40,100 |
| Gain in what you can buy, in today’s money | about ₹21,600 | about ₹3,600 |
| Real return | about 2.2% | about 0.4% |
Nothing about the deposit is wrong. It is safe, and over a short horizon safety is the point. But a household that keeps its long-term savings in deposits because they never show a loss is, after tax, holding its buying power roughly level, and a deposit at a lower rate than inflation shrinks it. The same arithmetic runs everywhere: in the US, the ten-year Treasury yielded 5.31% on 5 October 20269 against 2.95% on the inflation-protected TIPS of the same term10, and the 2.36-point gap is roughly the inflation the market expects over the decade.
Inflation works on a target as well as on a return. A corpus of ₹1 crore twenty-five years from now, at 4% inflation, buys what about ₹37.5 lakh buys today: 1 ÷ 1.04²⁵ is 0.3752. At 2% the same sum is worth about ₹61 lakh in today’s money; at 6%, about ₹23 lakh. A projection that quotes your savings in the money of the year you stop working will show large figures, and they are right — they are simply in a smaller unit.
What 100 of today’s money buys in the years ahead, at three inflation rates
| 2% inflation | 4% inflation | 6% inflation | |
|---|---|---|---|
| Today | 100 | 100 | 100 |
| 5 years | 91 | 82 | 75 |
| 10 years | 82 | 68 | 56 |
| 15 years | 74 | 56 | 42 |
| 20 years | 67 | 46 | 31 |
| 25 years | 61 | 38 | 23 |
| 30 years | 55 | 31 | 17 |
The way to read any long projection is to ask which money it is in. Nivritee’s FIRE Planner projects in each year’s own money, because that is what a bank statement in that year will say, and it prices the spending your independence has to cover at the same inflated rates — so the target and the savings are measured in the same unit and the verdict compares like with like. The outcome card says in words how the large future figure and the verdict fit together.
In 1997 Eldar Shafir, Peter Diamond and Amos Tversky asked people about pay rises, house sales and contracts under different inflation rates and found that they reason in both nominal and real terms at once, with the nominal figure pulling their judgement11. A 5% raise in a year of 4% inflation tends to feel better than a 2% raise when prices are flat, though the second leaves you richer. The finding has since been replicated with new samples12.
The illusion shows up in household money in familiar ways. A house bought for ₹40 lakh and sold for ₹1 crore twenty years later feels like a large gain; at 6% inflation the price only needed to reach about ₹1.28 crore to stand still in real terms, so it lost buying power2. A salary that doubles over fifteen years looks like progress until it is set beside what rent and school fees did in the same years. And a pension that is not linked to prices loses a third of its buying power in about fourteen years at 3% inflation.
A nominal return counts the growth in money; a real return counts the growth in what that money buys. The real return is (1 + nominal) ÷ (1 + inflation) − 1, so 7% with 5% inflation is about 1.9%4.
When both are small, yes. As they grow the shortcut overstates the real return; at 12% returns and 8% inflation it says 4% when the true figure is about 3.7%.
US shares returned about 6.6% a year after inflation from 1900 to 2025, against about 1.6% for long-term government bonds and 0.5% for Treasury bills1. Other markets returned less, and past returns are not a forecast.
Before tax, often slightly: SBI’s 6.25% against India’s 4% target is about 2.2% real8,2. After tax at a high rate, the real return can fall close to zero.
Either works if the target and the savings are in the same one. Mixing them — a target in today’s money against savings grown in future money — makes a plan look stronger than it is.
Most of the expensive mistakes after a layoff happen in the first fortnight: signing a severance agreement unread, claiming benefits late, letting health cover lapse, missing a loan payment without calling the lender, and cashing out retirement savings. This is the order to do things in, with the 2026 rules for the US, UK, India, Canada, Australia, Singapore and the UAE.
Repaying a loan earns its interest rate with certainty; investing earns an uncertain return, after tax. So costly debt goes first, a low-rate mortgage can sit beside investing, and an emergency fund and the right insurance come before both.
Insurance is for losses a household could not pay for itself: a large medical bill, the death of an earner somebody depends on, or years without income after an illness. Buy cover for those first, in that order, as plain term and health policies; size life cover to what dependants would need rather than to a multiple of salary; and be wary of policies that mix insurance with investment, which in India have returned 3–6% a year over 10 to 15 years.
This is general information, not financial, tax or legal advice for your circumstances. Rules and figures change; check the official source for your country, and consult a licensed professional before making financial decisions. Projections are estimates, not predictions.
