Whether you seek normal or early retirement, here are seven questions to ask once a year while reviewing your retirement portfolios.
1. What is the retirement corpus worth today? If you retire today, how many years can you be financially independent? If this number equals the years you expect to be alive from today, you are financially independent!
For example, suppose I can be financially independent without working for about 11 years if I retire today! To never work again, I would need a sum that would support me and provide me with an inflation-protected income stream for at least 40-45 years!
2. What is the projected worth of the retirement corpus? If the present corpus was allowed to grow until the expected retirement age at a reasonable rate (= return on investment), how many years can you be financially independent? If this number equals the years you expect to live after retirement, you can safely reduce further investments, if not stop them altogether.
For example, If I do not invest for retirement anymore and retire as per my plans at 65, I may have a corpus supporting me for about 10-11 years. I would need a corpus supporting me for 20-25 years!
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3. What is the growth rate of the retirement portfolio? What is the XIRR (annualized return) of each asset class? That is, the XIRR of equity holdings, PPF, EPF, NPS, gold, FD, real estate, etc. If the XIRR of the volatile asset classes is more or less close to your expectations, not much need be done. It might be time to rebalance if it is much higher than expectations. If it is much lower, you will need to look at the source of underperformance and take a call on it.
The current monthly investment required also indicates the portfolio growth rate. Things are reasonably fine if it is not too much higher than the initial monthly investment planned.
The goal analysis sheet of the automated mutual fund and financial goal tracker on Gooel Sheets answers these questions automatically).
4. What is the current monthly investment required? Considering the current corpus, what monthly investment is required today, increasing yearly at an assumed (reasonable!) rate? All is well if the monthly investment is lower than what you invest. Otherwise, you will need to cut expenses until you can invest enough.
5. Is your retirement in auto-pilot mode? For the salaried class, some investments like EPF are mandatory. Suppose the current monthly investment required is less than the monthly EPF contribution. In that case, your retirement is in auto-pilot mode, provided there is no significant break or contribution reduction due to layoffs or lesser-paying jobs.
The freefincal robo tool answers this holistically and comprehensively: How to use the freefincal robo advisory tool to track the progress of our financial goals
(Optional) Are you planning to retire early? If so, the first requirement is to invest as much as possible and as early as possible. If you do this consistently for at least a few years, use the financial robo-advisor tool to determine how soon you can retire.
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About The Author
Dr M Pattabiraman giving a lecture
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 14 years of experience publishing news analysis, research and financial product development. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
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Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (Published by CNBC TV18) for DIY investors.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want.
This book helps young earners get the basics right from the start! It will also help you travel to exotic places at a low cost!
(3) Chinchu Gets a Superpower! for kids.
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain?
What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management.
What readers say!
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
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