In this article, we discuss how to audit a financial freedom or retirement portfolio. All long-term financial goals require periodic review to ensure that they are on track and in line with expectations and assumptions made while planning for the goal.
Retirement is a unique financial goal because a corpus does not get spent within a day or at most a few years. It has to grow and provide income for several years to decades.
A basic goal-analysis sheet for ballpark estimation of financial goal progress is available with our Google sheets portfolio tracker. The current investment value from mutual funds and stocks is auto-updated in this sheet for revised estimates.
- Calculate the current value of the retirement corpus. Determine current values of mutual fund/stock holdings, PPF, EPF/NPS, FDs etc. and add them all up.
- What is the retirement corpus worth today? If you were to retire today, what number of years can you be financially independent? If this number is equal to the number of years you expect to be alive from today, you are financially independent!
For example, I can be financially independent without working for just about 11 years or so, if I retire today! In order to never work again I would need a sum that would support me, that is provided me an inflation-protected income stream for at least 40-45 years!
- What is the projected worth of the retirement corpus? If the present corpus was allowed to grow from now until the expected age of retirement at a reasonable rate (= return on investment), what number of years can you be financially independent? If this number is equal to the number of 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 that will support me for about 10-11 years. Whereas I would need a corpus that should support me for 20-25 years!
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- What is the current monthly investment required? Taking into account the current corpus, what is the monthly investment required today, increasing each year at an assumed (reasonable!) rate? If the monthly investment required is lower than what you actually invest, then all is well. Else, you will need to cut down expenses until you can invest enough.
- What is the growth rate of the retirement portfolio? What is the XIRR 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 needs to be done. If it is much higher than expectations, it might be time to rebalance. 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 is also a sign of the portfolio growth rate. If it is not too much higher than the initial monthly investment planned, things are reasonably fine.
- Is your retirement in auto-pilot mode? For the salaried class, some investments like EPF are mandatory. If the current monthly investment required is lesser than the monthly EPF contribution, your retirement is in auto-pilot mode, provided there is no significant break or reduction in contributions due to layoffs or lesser-paying jobs.
- 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 are doing this consistently for at least a couple of years, use the robo advisory tool to find out how soon you can retire.
Do be careful while interpreting these numbers and be sure to avoid these common retirement planning mistakes.
If you could go through these seven steps once a year, you can ensure that your retirement plans are on track.
The goals analysis sheet of our Google sheets portfolio tracker automates this review process with a ballpark analysis. Just remember to view it occasionally and not every day!
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