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Real return — the inflation-adjusted lens on performance. Real return equals the nominal return adjusted for inflation and represents the actual change in purchasing power. Mathematically: real ≈ (1 + nominal) / (1 + inflation) − 1, which accounts for compounding effects between investment gains and rising prices. For retirement planning and long-term goal setting, real returns are crucial: they reveal how much more you can buy in the future rather than just the percentage growth of account balances. A portfolio that grows nominally but fails to outpace inflation results in lower real wealth over time.

Planning, protection, and practical tools. Incorporate expected inflation into return assumptions and build buffers into savings targets. Use asset mixes that historically beat inflation (stocks, real estate, TIPS) while noting that inflation can be unpredictable. Treasury Inflation-Protected Securities (TIPS) directly track inflation and can protect purchasing power in fixed-income allocations, though they have tradeoffs (e.g., lower real yields in some regimes). Also consider that taxes interact with inflation—nominal gains taxed at ordinary rates can further erode real after-tax returns. For robust planning, stress-test models with higher inflation scenarios and choose instruments that align with your inflation risk tolerance.

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By Quiz Coins

Persistent inflation erodes cash purchasing power, which is why savers often seek investments that outpace inflation.

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