What is the difference between nominal and real return?

A nominal return is the percentage gain your investment shows on paper. A real return adjusts that figure for inflation to show what you actually gained in purchasing power. If your portfolio returned 8% and inflation was 3%, your real return was approximately 4.85% — not 5%, because the relationship is multiplicative rather than additive.

How do I calculate inflation-adjusted return?

Use the Fisher equation: real return = ((1 + nominal return) / (1 + inflation rate)) − 1. For example, a 7% nominal return with 2% inflation gives a real return of approximately 4.9%. Subtracting inflation rates directly (7% − 2% = 5%) is a common approximation that slightly overstates the real return.

What inflation rate should I use for long-term planning in Canada?

The Bank of Canada targets 2% annual CPI inflation. For long-term projections, many Canadian financial planners use 2–2.5%. Historical Canadian CPI has averaged roughly 3% over the past 50 years, so using 2–3% is a reasonable range to stress-test projections against.

Inflation-Adjusted Returns: Real vs Nominal Growth

Your nominal return tells you what your account balance shows. Your real return tells you what that balance is actually worth — what you can buy with it in today's dollars.

Nominal vs real return — the difference

A nominal return is the percentage gain your investment shows in account statements. A real return adjusts that figure for inflation to show what you actually gained in purchasing power. If a portfolio returned 8% and inflation was 3%, the real return was approximately 4.85% — not 5%, because the relationship is multiplicative rather than additive.

The Fisher equation

Real return = ((1 + nominal return) ÷ (1 + inflation rate)) − 1

Example: 8% nominal return, 2.5% inflation → real return = (1.08 ÷ 1.025) − 1 ≈ 5.37%. The common approximation (8% − 2.5% = 5.5%) slightly overstates the real return.

Worked example: $10,000 at 8% for 30 years

Starting with $10,000, adding $400/month at 8% annual return compounded monthly over 30 years:

Nominal ending balance: approximately $705,501
Inflation-adjusted at 2% (Bank of Canada target): approximately $389,487 in today's dollars
Inflation-adjusted at 3% (30-year historical average): approximately $290,657 in today's dollars

The nominal projection looks large, but 30 years of 3% inflation means prices are roughly 2.4 times higher — so that balance only purchases what $290,657 buys today. Planning on the nominal number alone can leave a significant gap.

Inflation in the Canadian context

The Bank of Canada targets 2% annual CPI inflation. Many Canadian financial planners use 2–2.5% as a baseline and 3% as a conservative stress-test. Recent years (2021–2023) showed that inflation can run significantly above target for extended periods. The compound interest calculator includes an optional inflation field that shows your ending balance in today's purchasing power.

Frequently asked questions

What is the difference between nominal and real return?: A nominal return is the percentage gain your investment shows on paper. A real return adjusts that figure for inflation to show purchasing power gained. If your portfolio returned 8% and inflation was 3%, your real return was approximately 4.85%.
How do I calculate inflation-adjusted return?: Use the Fisher equation: real return = ((1 + nominal return) ÷ (1 + inflation rate)) − 1. For example, a 7% nominal return with 2% inflation gives a real return of approximately 4.9%. Subtracting directly (7% − 2% = 5%) overstates the real return.
What inflation rate should I use for long-term planning in Canada?: The Bank of Canada targets 2% annual CPI inflation. Using 2–3% is a reasonable range for stress-testing projections.