A retirement planning calculation is defined by its inputs and assumptions. This article discusses what portfolio return we should assume while planning for retirement.
A return has little meaning as it has to be benchmarked to inflation. Also, we should not forget to factor in taxes. Another common mistake investors make while planning is using their expected equity return for the entire portfolio return.
A portfolio is a mix of equity and debt (gold for some). So the net portfolio return after tax will always be lower than the return we expect from stocks or equity mutual funds. Also, the equity allocation (if high) will have to be lowered in future. This will also reduce the expected portfolio return. See, for example, the freefincal robo advisory tool output here: I realized the importance of retirement planning only at 35; is there any hope for me?
Return assumption before retirement:
- We recommend using inflation of at least 7%
- Initially, while starting the journey, you can use a post-tax overall portfolio return of about 10%. That is a real return of about 3%. This is not practical, but it would demotivate many as realistic numbers would mean the investment to be made is quite high.
- Once you get experienced, and your corpus has grown, you can reevaluate your expectation and lower the real return to about 2% or even lower if you can handle the investments.
- On the other hand, if you choose to factor in equity reduction to handle the sequence of returns risk like the freefincal robo advisory tool does, a single return assumption is good for several years. Note: all retirement planning calculations should be redone yearly with fresh inputs regardless of the approach used.
Return assumption after retirement:
- We recommend using inflation of at least 5-6%
- The post-tax overall portfolio return assumption can be the same as inflation or slightly less. That is, expect no more than zero returns (after tax). When we are young, this might seem like a foolish assumption. Still, it begins to make sense as we age —beating inflation after retirement is hard and cannot be consistently done unless we risk capital and financial independence.
- A better approach is to focus on a bucket strategy where the corpus is divided into different buckets. The freefincal robo tool uses an income bucket, a low-risk bucket, a medium-risk bucket and a high-risk bucket as illustrated here: Retirement plan review: Am I on track to retire by 50?
- Naturally, a bucket strategy also will have return assumptions, but that is better than relying on a single return expectation to determine the corpus. Retirement buckets allow us to handle the risk of corpus depletion due to poor capital market returns, particularly in the first decade of retirement.
- For example, we can plan for enough funds in the income bucket to provide an inflation index for the first 15 years of retirement. We can increase the margin of safety with the help of a single annuity – Creating the ideal retirement plan with income flooring!
- Or with multiple annuities: Use this annuity ladder calculator to plan for retirement with multiple pension streams
In summary, there is more to retirement planning than using a single real return before and after retirement. The planning is a lot more nuanced. We need to factor in the systematic reduction in equity before retirement and a bucket strategy supported with one or more annuities after retirement.
Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Podcast: Let’s Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it’s content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)
