Real Rate of Return – What It Is and Why It Matters More Than Nominal

When a bank advertises a deposit with 6% annual interest, most people think: "Great, I will earn 6%!" But that is an incomplete picture. If inflation is 5%, your real gain is only about 1% – and after accounting for capital gains tax, you may find you are not earning anything at all. The key to understanding whether your money is truly working is the concept of the real rate of return.

Definition: Nominal vs Real Rate of Return

Nominal Rate of Return

This is the gain expressed in money, without accounting for changes in purchasing power. If you invested PLN 10,000 and after one year you have PLN 10,600, your nominal rate of return is 6%. Simple.

Real Rate of Return

This is the gain adjusted for inflation – it shows how much the real purchasing power of your money has gained (or lost). If you earned a nominal 6% but inflation was 5%, your real rate of return is roughly 1%.

Why Does This Matter?

Money has no intrinsic value – its value comes from what you can buy with it. The nominal rate tells you how much money you have. The real rate tells you how much you can buy. The latter is what truly matters.

How to Calculate the Real Rate of Return

Simplified Method

The simplest method is straightforward subtraction:

Real rate of return ≈ nominal rate - inflation

With a nominal rate of 6% and inflation of 4%: Real rate of return ≈ 6% - 4% = 2%

This method is sufficiently accurate at low inflation levels (up to about 5%).

Precise Method – The Fisher Equation

For higher inflation values (or when you need precision), we use the Fisher equation:

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

Where:

• r = real rate of return
• n = nominal rate of return
• i = inflation rate

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

Fisher Equation Example

Nominal rate: 10%, inflation: 8%

r = (1 + 0.10) / (1 + 0.08) - 1 r = 1.10 / 1.08 - 1 r = 1.0185 - 1 r = 0.0185 = 1.85%

Compare with the simplified method: 10% - 8% = 2%. The difference is 0.15 percentage points. At higher inflation values, the difference becomes more significant.

Accounting for Tax

In Poland, a 19% capital gains tax (podatek Belki) is levied on investment profits. The after-tax real rate of return is calculated as:

Net real rate of return = nominal rate × (1 - 0.19) - inflation

Or more precisely:

r_net = (1 + n × 0.81) / (1 + i) - 1

Example with Tax

Deposit at 6%, inflation 4%:

• After-tax rate: 6% × 0.81 = 4.86%
• Real rate of return: 4.86% - 4% = 0.86%

Compare: without tax the real rate is 2%, with tax only 0.86%. Tax cuts the real gain by more than half!

Real Rate of Return of Different Asset Classes in Poland

Bank Deposits

Historically, deposits in Poland have offered a real rate of return (after tax) ranging from -12% (inflation peaks of 2022–2023) to +2% (periods of low inflation). On average, the real return on deposits is close to zero or slightly negative.

Government Bonds COI/EDO

Inflation-indexed bonds guarantee a real rate of return equal to their margin above inflation. With a margin of 1.25% (COI) or 1.75% (EDO), the after-tax real rate is approximately 1.01% and 1.42% respectively. On an IKE (tax-free) – the full margin.

Equities (WIG)

The Warsaw Stock Exchange Index (WIG) delivered an average annual nominal return of approximately 7–9% over 2000–2025. With average inflation of about 3%, the real rate of return is roughly 4–6% per year. But beware – volatility is enormous. In individual years, WIG has fallen 50% or risen 80%.

Real Estate

The average annual increase in residential property prices in major Polish cities over 2010–2025 was approximately 5–8% nominally. Adding rental income (3–6% gross), the total nominal return is roughly 8–14%. Real rate of return: approximately 5–10% (before maintenance costs).

Gold (in PLN)

Gold priced in Polish zloty delivered an average annual nominal return of approximately 8–12% over 2000–2025 (thanks to both the rise in USD gold price and the weakening of the zloty). Real rate of return: approximately 5–9%.

Cash

The real rate of return on cash is always -inflation. At 5% inflation, you lose 5% per year. No exceptions.

Impact of Inflation on Long-Term Investments – Simulations

PLN 100,000 Over 20 Years at Different Real Rates

• Real rate -2%: PLN 66,761 (loss of one-third of value)
• Real rate 0%: PLN 100,000 (stagnation)
• Real rate +2%: PLN 148,595 (growth of nearly 50%)
• Real rate +5%: PLN 265,330 (nearly tripling)
• Real rate +7%: PLN 386,968 (nearly quadrupling)

These simulations show how dramatic the difference is between a negative and a positive real rate of return over the long term.

Impact on Retirement Savings

Suppose you save PLN 1,000 per month for 30 years:

• Real rate 0%: PLN 360,000 (sum of contributions)
• Real rate +3%: ~PLN 582,000
• Real rate +5%: ~PLN 832,000
• Real rate +7%: ~PLN 1,220,000

The difference between 0% and 5% real rate is over PLN 470,000 in additional real value!

Traps in Thinking About Returns

Trap 1: Money Illusion

People naturally think in nominal terms. If your salary rose from PLN 8,000 to PLN 8,500 (a 6.25% increase), you feel richer. But if inflation was 7%, you are earning less in real terms. Your nominal rise masks a real decline in purchasing power.

Trap 2: Nominal Comparisons

Comparing nominal rates of return from different periods is misleading. A deposit at 15% in 1995 (with 28% inflation) produced a real loss, while a deposit at 3% in 2016 (with 0% inflation) produced a real gain.

Trap 3: Ignoring Tax

Many investors compare nominal rates without accounting for tax. In Poland, the 19% Belka tax has a huge impact on the real rate of return, especially when inflation is close to the interest rate.

Trap 4: Short-Term Thinking

Focusing on the return over the last year or quarter leads to flawed decisions. The real rate of return matters primarily over the long term – that is where compound interest effects accumulate.

Trap 5: Assuming Constant Inflation

Inflation is not constant – it changes over time, sometimes dramatically. Financial planning should account for various inflation scenarios rather than assuming a single fixed rate of price growth.

Real Rate of Return in the Context of Polish Monetary Policy

The Role of NBP

The National Bank of Poland (Narodowy Bank Polski) pursues monetary policy aimed at keeping inflation near its target (2.5% ±1 pp.). NBP interest rates influence:

• Deposit and lending rates
• Government bond yields
• The zloty exchange rate (indirectly affecting imported inflation)

NBP Real Interest Rates

The NBP real interest rate is the reference rate minus inflation. When the real rate is negative (i.e. the nominal rate is lower than inflation), monetary policy is "loose" – this supports economic growth but does not help savers. When the real rate is positive, policy is "restrictive" – it curbs inflation but offers a chance for real returns on savings.

In Poland, real interest rates were deeply negative in 2020–2023 (the reference rate well below inflation). The normalisation process continued through 2025.

Inflation Target and Real Rates of Return

If NBP successfully maintains inflation near its target (2.5%), the real rate of return on most safe instruments (deposits, fixed-coupon bonds) should be close to zero or slightly positive. Positive real returns on safe instruments are the exception rather than the rule.

Practical Applications of the Real Rate of Return

Retirement Planning

If you plan to retire in 25 years and need PLN 10,000 per month (in today's prices), you must calculate what that will cost in the future. At 3% annual inflation, PLN 10,000 in 25 years equals PLN 20,938. Your savings plan must account for this.

Evaluating Investments

Before judging whether an investment is "good," calculate its real rate of return. A deposit at 5% with 6% inflation is a real loss – regardless of how attractive the nominal rate looks.

Budgeting

If your expenses rise with inflation but your income does not (e.g. a fixed annuity or pension), your real financial situation deteriorates. Regular monitoring of real changes in income and expenses is essential.

Comparing Financial Offers

Two banks offer deposits: 5.5% for 6 months and 5% for 12 months. Which is better? Without accounting for expected inflation in each of those periods, it is impossible to answer.

Tools for Calculating the Real Rate of Return

Source Data

• CPI inflation – monthly publications by GUS (stat.gov.pl)
• NBP interest rates – NBP website (nbp.pl)
• Deposit rates – financial comparison sites, bank websites
• Stock indices – stooq.pl, bankier.pl, GPW

Online Calculators

Many financial websites offer real rate of return calculators. Tools such as Freenance help automatically track real rates of return on your savings and investments, presenting data in a clear format.

Spreadsheets

A simple spreadsheet in Excel or Google Sheets allows you to calculate the real rate of return for any portfolio. Key formulas:

• Real rate (simplified): =nominal - inflation
• Real rate (Fisher): =(1+nominal)/(1+inflation)-1
• Real rate after tax: =(1+nominal*0.81)/(1+inflation)-1

Real Rate of Return and Financial Goals

Goal: Preserving Value

If you simply want to maintain the purchasing power of your savings, you need a real rate of return of 0%. This means your investment must deliver a nominal gain equal to inflation (plus the tax surcharge).

Goal: Real Growth

If you want your money to grow in real terms (i.e. buy more and more), you need a positive real rate of return. Every percentage point above zero is a real increase in your wealth.

Goal: Retirement

For retirement purposes, you need a real rate of return of at least +3-5% so that compounding over 20–30 years produces sufficient capital. This requires exposure to risky assets (equities, real estate) – safe instruments will not deliver this.

Summary

The real rate of return is the most important metric for every saver and investor. Key takeaways:

1. The nominal rate of return is misleading – only the real rate, after inflation and tax, matters
2. The Fisher equation gives more accurate results than simple subtraction
3. The Belka tax (19%) drastically reduces the real rate of return
4. Most safe instruments offer a real rate close to zero or negative
5. For long-term goals, you need assets delivering +3-5% in real terms annually
6. Money illusion is the saver's greatest enemy – think in real terms

Start with one simple step: next time you see a deposit rate or investment return, subtract the current inflation. What remains is your true profit. And if what remains is negative – it is time to change strategy.