Here are nine steps beginners can follow to start planning for retirement. We will assume that retirement is 25 years away.
The first step involves defining your target. The purpose for the funds and the timeline for when they are needed are already established, accounting for 25% of the planning. Investors often ask, “What return can I expect from equity over three years?”.
If we respond that three years is too risky, they might extend it to five years, perhaps ten. However, effective planning is impossible without understanding the purpose and timeline for the investment.
Although retirement planning might seem straightforward, our goals and desires evolve over time. Therefore, retirement planning is not a one-time event but a yearly task. Once the necessary groundwork is established, it can take just 15 minutes to complete each year.
The second step is to acknowledge inflation. India’s long-term inflation rate is roughly 6% without factoring in extra expenses. Assuming an inflation rate of 7-8% is a safe bet if we account for lifestyle changes, whether positive or negative. While it’s plausible that it could decrease in the future, considering our dependency on imported fuel—a major contributor to overall inflation—it’s best to remain cautious and assume at least 7% inflation before retirement and 6% after.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
The third step is determining our desired post-tax return on our investment portfolio. While it could be 5%, 7%, or 9%, it’s clear that the lower the expected return, the more we will need to invest to reach our desired retirement fund.
Inflation is our performance yardstick. Our portfolio’s after-tax return for the next quarter century should at least be equivalent to inflation. To begin with, we’ll predict a 7% inflation rate and an overall portfolio return of 8%. However, these estimates will be adjusted over time.
The fourth step involves devising an asset allocation strategy based on these returns. We need to have return expectations from various asset classes to do this. It’s unrealistic to anticipate an 8% post-tax return from fixed-income assets. Over the next 25 years, we can foresee the Public Provident Fund (PPF) rate barely falling below 7%. The Employee Provident Fund (EPF) might still theoretically yield 8%. Still, if the current trend continues, subscribers might only receive “annual” interest roughly every five years due to the delay in EPF interest payment.
Relying solely on fixed income is not sufficient. The return from fixed income should be expected to be significantly lower; a reasonable assumption for now would be a 6% post-tax return. However, these estimates should be revisited and adjusted annually.
A safe assumption for long-term return from equity would be 9% after tax. Why? See:
- What return can I expect from a Nifty 50 SIP over the next ten years?
- Do not expect double-digit returns from Nifty Next 50 index funds!
- Nifty 50 SIP Returns Jump up by 7%, but the returns trend is opposite to price!
Some people react, “If I am going to have to expect only 9% over equity over the long term, I might as well invest in high-return bonds or FDs”. The risk, particularly hidden risk, is incredibly high here. If the stock market crashes, there is an excellent chance it will eventually recover. If a corporate FD or bond defaults, you might kiss your money goodbye (unless it is EPF, which defaults on its debt yearly like clockwork).
The fifth step is to decide the initial* asset allocation mix.
* The word “initial” is in bold red because we must plan an equity de-risking strategy – this can be automated with the robo advisory tool.
Suppose we decide on a 50% equity and 50% fixed income portfolio – this works quite well: see: Will Benjamin Graham’s 50% Stocks and 50% Bonds strategy work for India? – then, the overall portfolio return (our aim) is:
[50% x 9%] + [50% x 6%] = 7.5%
This may disappoint many, but please recognise that this is not your portfolio’s annual return. This is the expected overall portfolio return after 25 years (in this case), which is not bad.
Of course, when we project it on a spreadsheet, the 7.5% will be an annual return, but annual equity returns easily fluctuate from -50% to 150%, so it is important not to take that projection too seriously. See: My retirement equity MF portfolio return is 2.75% after 12 years!
A few good years for equity, regular rebalancing and a systematic investment increase will reduce our dependence on X% or Y% returns. It will take a few years. Got to hang in there. See The 2016 Personal Finance Audit: Returns do not matter!
Avoiding disappointment with simple annual reviews and rebalancing is easier if we expect less.
The sixth step is to find out the retirement corpus required. That is, we need to either use a retirement calculator or build one ourselves. This is a guide for building a basic calculator: Find out how much you need to retire!
You can also use the robo-advisory tool to include your existing investments, pension or income sources, an asset allocation schedule, and a post-retirement bucket strategy with income flooring or annuity laddering features.
Before we do this, it is essential to understand that the investment required will be higher than we can afford. This is a law of nature. There is no need to worry. We need to put our heads down and increase our investments as much as possible, at least increase at the rate of inflation, but a bit higher, say 10%, would be near-ideal: Why increasing investments each year is crucial for financial freedom.
Note to the newbie: We are six steps in and have not discussed any products. If we plan first, the product categories can be derived. If we look for products first, either we change the plan to fit the product or spend years undoing past mistakes.
“How to run a marathon?” asked the newbie to the Guru.
The guru said: “you need to train for many months. Starting with short distances and then gradually increasing the distance.”
The newbie said angrily, “that is fine. Just tell me how to run a marathon?”
The seventh step is investing. Where should I invest that 50% equity? There are many choices, but the simplest would be a Nifty 50 index fund. The 50% fixed income for the salaried can be EPF, PPF, VPF, and NPS (with little or no equity).
The eighth step is the annual portfolio review. Initially, a simple asset allocation check and rebalancing are enough. I do this each December: Portfolio Audit 2021: How my goal-based investments fared this year.
If you want some inspiration, check out reader reviews:
- How Suhas tracks his MF investments and reviews financial goals.
- How Avadhoot Joshi evaluates his investment portfolio.
- How a single mom is on track to financial freedom
- How Gowtham started goal-based investing & took control of his money
- Why my financial independence & early retirement plans were postponed by four years?
The ninth step is to stay the course. Have the conviction to stick to the plan and stay disciplined. Not much has happened for many years, but hang in there. Equity returns are not uniform. Sometimes it will pour, and sometimes it will be dry. We must keep investing during the dry periods to change our lives when it pours.
We are on Google News
Use this button to add freefincal.com as a preferred personal finance source on Google News.
Explore 1,400+ videos on YouTube!
Subscribe to get posts via email!
Join 32,000+ readers and get free money management solutions delivered to your inbox! (Link takes you to our email sign-up form)Join our WhatsApp Channel
Explore our products
🔥Join our community of 9000+ users! 🔥- Use our Robo-advisory Tool to create a complete financial plan! More than 3,500 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
- Our Flagship Course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 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 the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
- Join the freefincal investor circle! An exclusive space for investors, advisors, fintech employees and students to access financial planning and insurance tools, mutual fund and stock analysis tools, coding strategies and Excel macros for data extraction. 750+ members are now part of our investor circle.
- Increase your income by getting people to pay for your skills! More than 900 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 seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
- Portfolio Tracker! Track your mutual funds and stock investments with our Google Sheet!
- We also publish monthly screeners for
Our Podcast: Let's Get Rich With Pattu
On Spotify: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! On Audible: Listen to the Let's Get Rich with Pattu Podcast
Listen to the Let's Get Rich With Pattu podcast on YouTube.
Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!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 has over 28 years of teaching and research experience. He is also a public speaker and keynote presenter.
- He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
- Connect with him via @pattufreefincal on X LinkedIn YouTube
- Pattabiraman has co-authored three print books.
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. 
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.
About freefincal & its content policy
Freefincal is a News Media organisation 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: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Our publications
- Your Ultimate Guide to Travel. This is an in-depth exploration of vacation planning, including how to find affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)
- How to profit from content writing: Our ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!