What is a real rate of return and why does it matter for retirement planning?

How it works in detail

When projecting retirement savings, the distinction between nominal and real returns is one of the most consequential assumptions you make. A portfolio that grows at 10% per year sounds impressive — but if inflation runs at 3%, your actual purchasing power only increases by about 7%. Financial researchers including William Bengen (who established the 4% rule in 1994) and the authors of the Trinity Study consistently used real returns in their analyses, specifically to produce results in today's dollars that remain meaningful over decades. For long-term FIRE planning, most practitioners use a real return assumption of 5–7% for a stock-heavy portfolio. Wade Pfau and Michael Kitces have both emphasized that sequence-of-returns risk — not average returns — is the dominant factor in retirement outcomes, but the real return assumption sets the baseline trajectory. Bond-heavy or conservative portfolios should use lower real return assumptions: 2–4% is common. TIPS (Treasury Inflation-Protected Securities) currently yield a real return that can be observed directly from market prices, providing a useful conservative benchmark. Using real returns simplifies planning because all figures remain in today's dollars — your $2,000,000 FIRE target means $2,000,000 of today's purchasing power, not a nominal figure that has been eroded by decades of price increases.