Lesson 1 of 3 · 8 min
The only return that counts
A corpus is spent in future rupees, so the growth rate that matters is the one left after inflation — and it is not the nominal rate minus the inflation rate.
Retirement planning is the one problem where the numbers are far enough apart in time that small errors compound into large ones. A corpus is built in today's rupees and spent in tomorrow's, so every calculation has to carry inflation through it. Most do not, and the shortfall shows up at the only moment nobody can do anything about it.
The rough version — nominal minus inflation — is close enough for a year and wrong for thirty. At 9% growth and 6% inflation the shortcut says 3%. The exact figure is 1.09 divided by 1.06, minus one, which is about 2.83%. That gap looks trivial and is not: compounded over three decades it is the difference between two materially different corpuses.
Your turn
Nominal return 12%, inflation 6%. What is the real return, as a percentage, to one decimal place?
Is a third of a percent worth the trouble?
KabirTara
Kabirasking
5.7 against 6.0. That is a rounding difference. Why does anyone care?
Taraexplaining
Because it is not applied once. It is applied every year for thirty years, and each year's error sits inside the next year's base. Small consistent errors in a compounding calculation do not stay small.
Kabirasking
So the direction of the error matters too.
Taraexplaining
It does, and it runs the wrong way. The shortcut always overstates the real return, so a plan built on it always projects more than it should. The error flatters you, which is why it survives.
Myth
“A 9% return with 6% inflation means your money grows 3% a year in real terms.”
Mostly false
Subtraction is an approximation that always overstates the real rate. Dividing gives about 2.83%. Over one year the difference is negligible; over a retirement horizon it is not, and it always errs in the flattering direction.
Check yourself
1 / 3
Kabir asks
How is a real return correctly calculated?
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