What is real rate of return?

The real rate of return is the rate of return on an investment after adjusting inflation in economy. An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender.

Real rate of return formula

The real rate of return calculation formula (known as Fisher equation) is as follows:

r = (1 + n)/(1 + i) - 1


  • r = real rate of return
  • n = nominal rate (or interest rate) of return
  • i = inflation rate

For example, if you have a nominal rate (interest rate) of return of 6% on an investment in a period when inflation is averaging 2%, your real rate of return is 3.922%.