Real vs nominal returns

Nominal and real are different units, not different opinions

A nominal return is the change in the dollar count of an account. A real return is the change in what the account can purchase, after the price level has moved underneath it. Both are legitimate numbers; the failure mode is treating them as interchangeable. A projection is a chain of multiplications, so a unit error does not stay small — it compounds for the full horizon exactly like a return or a fee does.

The conversion between the two units is the Fisher identity. The popular shortcut — subtract inflation from the return — is an approximation of it:

The subtraction shortcut is fine for talking; it is mildly wrong for compounding, and the error grows with both the inflation rate and the horizon. Everything below uses the exact form — and, more importantly, uses the realized CPI path of each historical window rather than a flat assumption, because as the ranges will show, the inflation rate itself is one of the least point-estimatable inputs in the whole projection.

What CPI deflation does to a 30-year projection

The after-taxes-and-fees calculator rolls a portfolio across every 30-year window in the S&P 500 total-return record, 1928–2025 (69 start years, 1928 through 1996; Damodaran annual series, dividends reinvested, asOf 2026-01), and deflates each window's ending value by that same window's realized December-over-December CPI-U (BLS, asOf 2026-01). Here is a $100,000 lump sum with no fees and no taxes — the same dollars, quoted in both units:

Same account, same market history — the only thing that changed between the first two rows is the unit. In the median window, the $2,170,314 nominal headline bought what $818,496 buys at the start of the window: CPI deflation removed roughly $1.35M of apparent wealth, more than the fee and tax leaks combined remove in the calculator's default scenario. And note the third row's spread: depending on which 30 years history dealt, a nominal dollar delivered anywhere from 21 to 53 cents of purchasing power. That factor-of-2.5 spread is why this site deflates by each window's realized CPI instead of assuming a flat 3% — the inflation path is a distribution, not a constant.

Run this scenario in the calculator — with fees at zero and a Roth account (no tax leak), the gap between the "gross, nominal" and "after tax, real" readouts is the inflation leak in isolation.

The same wedge in return space

Quoted as compound annual growth rates across the same 69 windows, the two units sit about 3.5 points apart — but neither is a single number:

Two readings matter here. First, the familiar rules of thumb — "the market does about 10%" and "about 7% after inflation" — are both median statements, and the historical bands around them are wide. Second, the real band is not simply the nominal band shifted down 3.5 points: inflation and equity returns do not move in lockstep window by window, so the real p5 of 4.6% sits proportionally much further below its median than the nominal p5 does. Inflation risk compresses the downside of real outcomes more than the nominal figures suggest.

The window decides how big the wedge is

Averages hide how violently the deflator itself varies. The cheapest 30-year window in the record for a saver, the 1928 start, saw prices rise only ×1.64 over three decades — the Depression's deflation offset later increases. The most expensive, the 1966 start, saw prices multiply ×4.82. Two illustrations from the record:

• 1965–1994: $100,000 compounds to $1,694,203 nominal — a 9.9% nominal CAGR that looks like a triumph — but prices rose ×4.79, so the real ending value is $353,893, a 4.3% real CAGR. Roughly 21 cents on the nominal dollar.
• 1996–2025 (the most recent complete window): $100,000 compounds to $1,871,717 nominal; prices rose ×2.12 (2.5% annualized), leaving $884,519 real — 47 cents on the dollar, a 7.5% real CAGR.

Similar nominal outcomes; real outcomes 2.5× apart. Over the full 1928–2025 record the US price level compounded at a 3.03% geometric mean and multiplied ×18.7 — a 1928 dollar buys about a nickel's worth today — while the most recent 12-month reading was +2.7% (CPI-U, December 2025, BLS; retrieved 2026-07). Any flat number you pick sits inside a 1.7%–5.4% band of realized 30-year outcomes.

If you contribute every year, the story holds

The wedge is not a lump-sum artifact. For $10,000 invested at the start of each year for 30 years ($300,000 contributed), across the same windows:

One honesty note the calculator surfaces: these contributions are fixed nominal $10,000s, so their real value shrinks over the window too. A saver who raises contributions with inflation ends higher in both units. Run the contributor scenario.

The double-counting trap

Mixing the units produces two mirror-image errors, and both circulate widely in FIRE planning:

• Deflating twice. The "7% rule of thumb" is already a real number — the median real CAGR above is 7.3%. Type 7% into a growth field and then also tick an "adjust for inflation" box at 3%, and the model compounds at roughly 3.9% real. Over 30 years that projects about ×3.1 instead of the median historical real multiple of about ×8.2 — an illustrative understatement of roughly 60%, which quietly inflates the savings target or pushes the projected FI date years out.
• Never deflating. The opposite error takes the 10.8% median nominal CAGR, compounds it to ×21.7, and reads the result as spending power. In the median window that overstates purchasing power by about 2.8× — and by nearly 5× in the high-inflation windows. Retirement spending is a real quantity; a nominal ending balance is not an answer to "can I afford my life."

The test for any calculator, this site's included, is that the return assumption and the inflation treatment are labeled as a pair. Here every projection states its unit next to the number, and the real-dollar toggle in the DCA backtest re-runs the identical windows with the CPI layer on, so you can watch the unit change move the numbers while the history stays fixed.

Which unit should a plan use?

Plan in real, report in both. Consumption is real: groceries, healthcare, and rent are bought at future prices, so a savings target or withdrawal plan stated in today's dollars is the one your intuition can actually audit. Nominal remains the right unit for contractual cash flows — a fixed mortgage payment, a fixed annuity payment, a bond's coupon — because those are defined in dollar counts, and inflation genuinely erodes them in your favor or against you. This is why the calculators here quote terminal values in real dollars by default where a toggle exists, while the show-the-math drawers keep the nominal intermediate steps visible: the two units answer different questions, and an honest projection shows which question each number is answering.