Nominal return minus inflation isn't your real return. It looks like it should be, and the gap is enough to matter by tens of thousands over thirty years.
At 7% nominal return and 3% inflation, the shortcut gives 7% − 3% = 4%. The correct answer is 3.88%. That 0.12 percentage point gap looks negligible until you compound it over three decades: on a hundred thousand it comes to €10,725.
This article explains what purchasing power is, how inflation erodes it, and which formula you actually need. Every table in this series using "real return" uses the correct version.
What purchasing power is
Purchasing power is what an amount can buy, not the amount itself. €1,000 stays €1,000 in your account, but what it buys falls every year prices rise.
What inflation does to €1,000, at different rates:
| After | At 2% inflation | At 3% | At 4% |
|---|---|---|---|
| 5 years | €906 | €863 | €822 |
| 10 years | €820 | €744 | €676 |
| 20 years | €673 | €554 | €456 |
| 30 years | €552 | €412 | €308 |
At 4% inflation, €1,000 is worth only €308 in today's purchasing power after thirty years. The figure on your statement doesn't change, and yet it buys two thirds less.
The same applies to a salary. €45,000 today is worth only €24,915 in today's purchasing power after twenty years at 3% inflation. That's why a salary staying nominally flat is, in practice, a hidden decline.
The formula almost everyone gets wrong
Here's the core of this article.
The common shortcut: Real return ≈ nominal return − inflation
The correct formula: Real return = (1 + nominal) / (1 + inflation) − 1
The gap looks small:
| Nominal | Inflation | Shortcut | Correct formula |
|---|---|---|---|
| 6% | 2% | 4.00% | 3.92% |
| 7% | 2% | 5.00% | 4.90% |
| 6% | 3% | 3.00% | 2.91% |
| 7% | 3% | 4.00% | 3.88% |
The shortcut always overstates your real return slightly. At low percentages the gap is negligible. At higher nominal returns and longer periods it compounds.
Why that gap matters
Compounded over thirty years on €100,000, at 7% nominal and 3% inflation:
| Method | Result after 30 years |
|---|---|
| Shortcut (4.00% real) | €324,340 |
| Correct formula (3.88% real) | €313,615 |
| Difference | €10,725 |
That gap isn't an error in your investment. It's an error in your calculation method, and it works against you: you think you have more than you actually do.
For most short-term goals this barely matters. For a thirty-year goal such as financial independence, it's exactly the kind of small, structural deviation this whole series tries to avoid.
Why every table in this series uses "4% real"
Now it becomes clear why. A target calculated with nominal return, without accounting for inflation, understates itself in today's purchasing power, and you only notice after twenty or thirty years, when adjusting is no longer possible.
Calculate with real return and you're automatically calculating in today's purchasing power. The target that results is one you could sense today, even though you'll only reach it decades from now.
That's why every target in this series, from your FIRE number to your pension gap as self-employed, is worked through with real return.
How to calculate your own real return
Three steps.
Step 1: establish your nominal return. What your funds, savings account or portfolio actually delivered, before adjusting for inflation.
Step 2: establish inflation over the same period. The statistics office publishes this monthly as the consumer price index.
Step 3: apply the formula.
(1 + nominal) / (1 + inflation) − 1
Example: your portfolio returned 8% this year, inflation was 3.5%.
(1.08 / 1.035) − 1 = 4.35% real
Not 4.50%, which the shortcut would give. Over one year the gap is trivial. Over a series of years, compounded, it adds up.
What things cost then, now
Another way to feel the same mechanism: working backwards instead of forwards.
| Amount | From | Value today |
|---|---|---|
| €100 | 10 years ago | €128 |
| €100 | 20 years ago | €155 |
| €100 | 30 years ago | €187 |
What cost €100 ten years ago costs roughly €128 now. That's the same inflation, just viewed the other way: not what your money will be worth in thirty years, but what old money should be worth now.
That's a handy check: think about what groceries, rent or a salary cost ten years ago, and compare that to a factor of roughly 1.28. Does that roughly match your own experience? Then you're using a realistic inflation assumption.
What this means for your assumptions
Three practical lessons.
Always calculate in real return for long-term goals. Nominal return feels more impressive and says less about what you can actually buy.
Use the correct formula, not the shortcut. The gap is small per year and grows with the term and with higher returns.
Be cautious with your inflation assumption. Dutch historical averages sit around 2 to 2.5% over long periods, though recent years ran well above that. Run your target at both 2% and 3.5% inflation to see how sensitive your outcome is.
How Gylder fits in
Every target calculated with the bridge calculator uses a real return, not a nominal percentage you must subtract inflation from yourself. That prevents exactly the mistake in this article.
Your money-weighted return, calculated on your actual deposits and withdrawals, is a nominal figure, because it concerns what your portfolio actually did. Set that against your target and you're deliberately working with both concepts rather than conflating them, which is exactly where the shortcut error usually creeps in.
What this doesn't tell you
Future inflation is uncertain. The historical figures here are averages over long periods with considerable fluctuation between them.
Personal inflation differs from the official index. The index measures an average consumption pattern. Spend heavily on healthcare or rent and your personal inflation can run above the national figure.
This isn't advice. Which inflation assumption you use for your own planning is an estimate, not a certainty.
Frequently asked questions
How do I calculate my real return? (1 + nominal return) divided by (1 + inflation), minus 1. Not nominal return minus inflation; that shortcut always overstates your real return slightly.
What's the difference between the shortcut and the correct formula? At 7% nominal and 3% inflation the shortcut gives 4.00%, the correct formula 3.88%. Small per year, but over thirty years on a hundred thousand it's over ten thousand euros.
What is purchasing power? What an amount can buy, rather than the amount itself. Inflation erodes purchasing power even if the figure in your account stays flat or rises.
Why does Gylder calculate with real return? Because a target in nominal euros thirty years out says nothing about what it will buy then. Real return keeps the target in today's purchasing power.
How high is inflation in the Netherlands on average? Roughly 2 to 2.5% a year over long periods, with recent peaks above that. The statistics office publishes the current figure monthly.