The actual financial benefit of an investment after accounting for inflation and taxes. The after-tax real rate of return is an accurate measure of investment earnings and usually differs significantly from an investment’s nominal rate of return. Calculated as the nominal return – inflation rate x tax rate = Real Rate of Return.

Assume your bank pays you interest of 5% per year on the funds in your deposit account. If the rate of inflation is 3.5% per year, and your tax rate is 33% the real return on your savings is 1%.

You may think 5% sounds great, however, when taking into account inflation and taxes, it is a very low return. If the nominal interest rate goes down, inflation goes up (global inflation was 5.05% in 2011), and taxes go up you can have a negative return on your savings.

 

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