In 1980, a certificate of deposit (CD) briefly yielded nearly 19%.
Just imagine that offer today: a risk-free 19% yield. Not even Bernie Madoff promised something that sweet.
But the reality wasn’t so sweet. Inflation was running in the double digits. After adjusting for rising prices and then paying taxes on the interest, the actual return was far less impressive. What looked like easy money was in reality a modest gain in purchasing power.
Nominal returns are the headline number.
Real returns are what you actually keep.
Nominal vs. Real
Nominal return is the figure on your statement.
- A CD paying 4%.
- A bond yielding 5%.
- A portfolio up 8%.
Real return is what’s left after inflation and taxes take their cut.
Example:
- Portfolio return: +7%
- Inflation: -3%
- Taxes: -2%
- Real return = +2%
That 2% is the part that actually matters. It’s what protects your lifestyle, pays for your goals, and keeps your plan on track.
Why This Matters
At the time of writing this, the Federal Reserve has signaled that it may begin cutting interest rates.
Rate cuts don’t just move markets. They also affect households directly.
For investors, lower rates can provide a short-term boost to asset prices.
For homeowners who bought in the past few years at higher mortgage rates, a drop in rates could open the door to refinancing – cutting monthly payments and freeing up cash flow.
That’s real money, not just a nominal shift on a statement.
Where You Hold Money Matters
Inflation is obvious. You feel it at the grocery store. Taxes are less visible but just as powerful.
Take a bond yielding 5%.
If that bond sits in a taxable account and you are in a high bracket, your after-tax return might be closer to 2.5-3.5% (before inflation!).
Place the same bond in a tax-deferred account, and your after-tax return improves. Put in a Roth (which we typically reserve for assets with high-growth potential), and the real, after-tax outcome can be dramatically better.
This is asset location. It does not change nominal returns, but it directly affects how much of those returns you keep.
For households with meaningful wealth, this difference is not trivial.
What You Can Do
You cannot control Fed policy or inflation.
But you can control the levers that drive real returns over time:
- Savings rate – the fuel that powers compounding.
- Asset allocation – the mix of stocks, bonds, and other assets aligned to your goals.
- Asset location – placing investments in the right accounts to minimize tax drag.
- Behavior – staying invested instead of reacting to every headline.
These are the factors that turn nominal returns into real purchasing power.
Final Thoughts
That 19% CD from 1980 looked incredible on paper. After inflation and taxes, it wasn’t nearly as generous. The same lesson applies today.
Nominal returns grab attention. Real returns quietly determine whether you can retire comfortably, fund education, take the trips you want, and live the life you envision.
So the next time you hear about a “can’t miss” yield or see markets celebrating a Fed move, pause and ask the only question that matters:
What is my real return?
That’s the scorecard that counts.
