Inflation and purchasing power: what is a real return?
Use the inflation adjustment formula to compare future money with today’s purchasing power and distinguish nominal from real investment returns.
Adjust future money to today’s prices
Today’s purchasing power of a future amount = future amount ÷ (1 + annual inflation rate)^years. At 3% inflation, 10,000 received in five years buys roughly what 8,626 buys today: 10,000 ÷ 1.03^5. The calculation assumes a constant rate and a matching currency. Try your own period in the inflation calculator.
Compare nominal and real growth
An investment that grows 5% while prices rise 3% has a pre-tax real return of (1.05 ÷ 1.03) − 1 ≈ 1.94%, rather than exactly 2%. The real return calculator keeps both rates on the same annual basis. Inflation is an average across goods; your own spending may rise differently.
Plan without treating assumptions as forecasts
Test several rates and include fees and taxes when they affect the amount you can actually spend. If the return varies each year, one constant-rate estimate hides the path. The CAGR guide explains what a smoothed annual rate can and cannot show. Investor.gov defines purchasing power in terms of the goods and services money can buy.