Last Updated on October 2, 2023 at 11:51 am
In this article, we explain how to track the progress of our financial goals. We use the freefincal robo advisory tool for this purpose as many readers and users are interested in knowing how. The robo tool, as many readers would know, is a financial planning tool. It automates the systematic risk management process and suggests a variable asset allocation schedule with step-wise equity reduction.
The above features have been demonstrated in several illustrations before. Below is a screenshot of the variable asset allocation schedule and how the expected portfolio return changes. The investment schedule factors into these changes from day one.
In addition, the tool also provides a detailed retirement bucket strategy implementation plan to generate inflation-protected income after retirement by considering up to three different sources of income (pension, rent etc.).
Video: Features of the Robo tool explained
How to use the robo tool to track the progress of our financial goals?
Example 1:
Consider a 30-year-old with Rs. 40,000 monthly expenses that will continue in retirement. In addition, he has Rs. 40,000 as annual expenses (health insurance premium etc.)
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| Age he wishes to retire | 50 |
| Years to Retirement | 20 |
| Total average monthly expenses (annual/12) | 43,333 |
| Percentage by which monthly investments can increase each year (until you have accumulated enough for retirement) | 10% |
| Post-tax return expected from equity investments % | 10 |
| Post-tax return expected from current taxable fixed income % | 6 |
| Rate of return expected from current tax-free fixed income % | 7 |
The user can freely change these percentages at the back end (settings page).
We will assume no current investments.
| Inflation before retirement (%) | 8 |
| The assumed life expectancy of the younger spouse (if married) | 90 |
| Inflation during retirement (%) | 8 |
| Years to Retirement | 20 |
| Monthly expenses in the first year of retirement | 2,01,975 |
| Years in retirement (until younger spouse reaches age 90) | 40 |
Results
| NET corpus required at retirement (assuming money will be invested in different buckets. This is after accounting for the future value of current investments, post-retirement benefits (cells C14-C18 in step 2) any post-retirement income specified in step 2) | 9,53,63,113 |
| The GROSS Corpus required for retirement is (provided only for information. Your investment target is the net corpus above | 9,53,63,113 |
So the target corpus is about Rs. 9.5 Crores.
The recommended asset allocation is 60% equity for the next eight years and then gradually reducing to 36% at the time of retirement.
| Initial monthly investment required, including EPF/NPS contributions (scroll down to see investment schedule) | 68,451 |
| Percentage by which your monthly investments can increase each year (until you have accumulated enough for retirement) | 10% |
So these are the results obtained upon the first use of the robo tool.
One year later, assuming the person has invested as per the schedule and assuming his equity and debt instruments have grown to (including gains) Rs. 4L and Rs. 7 lakhs and Rs. 4 lakhs respectively.
If we account for this, the required corpus decreases. This is because we have factored in how much the current investment will grow.
| NET corpus required at retirement (assuming money will be invested in different buckets. This is after accounting for the future value of current investments, post-retirement benefits (cells C14-C18 in step 2), any post-retirement income specified in step 2) | 8,26,30,524 |
| The GROSS Corpus required for retirement is (provided only for information. Your investment target is the net corpus above | 8,82,99,179 |
The monthly investment required also has decreased.
| Initial monthly investment required, including EPF/NPS contributions (scroll down to see investment schedule) | 68,081 |
| Percentage by which your monthly investments can increase each year (until you have accumulated enough for retirement) | 10% |
Thus all a user has to do is redo the calculations with fresh inputs once a year. Considering the accumulated corpus, the required target corpus and investment will gradually decrease. This is a practical way to find how close we are to achieving our goal. The user can copy the above results and paste them on a new sheet to check their progress across the years.
The proof of the pudding is that the investment amount required gradually decreases. The robo tool offers an accurate way to track the progress of our financial goals. In the above-mentioned new tracker, we will have basic goal-tracking features, which are based on simplistic assumptions and are only ballpark estimates.
Example 2:
Consider a 45-year-old investor who wants to retire by 50. He wants to know the value of his current corpus. Can he retire now instead of five years from now? (also see video guide below).
To do this, the user must set the retirement age as 45.
(a) Suppose he has about 1 Crore in assets, about 50% in equity and 50% in debt. The tool would say:
| Corpus necessary to provide inflation-protected income for the first 15Y in retirement. This amount includes an emergency corpus for about 13.3 Lakhs | 1,24,83,733 |
| The total amount currently in hand | 1,00,00,000 |
| You will not be able to generate an indexed pension in addition to a regular pension (if any); please consider buying an annuity with your corpus, keeping at least the sum mentioned (cell C36) above as an emergency corpus. |
So the user knows how much more he has to accumulate. He can set the retirement age as 46, 47 etc., to find out how much more he has to invest.
(b) Suppose we increase the existing corpus to 75 Lakhs in equity and 75 Lakhs in debt and set the retirement age back to 45. The current equity: debt asset allocation will not influence the recommendations.
| The corpus necessary to provide inflation-protected income for the first 15Y in retirement. This amount includes an emergency corpus for about 13.3 Lakhs | 1,24,83,733 |
| Total amount in currently in hand | 1,50,00,000 |
| ‘excess’ corpus available for investment | 25,16,267 |
| Corpus required to provide inflation-protected income after the first 15Y in retirement to the remainder of your lifetime | 1,55,40,667 |
For a person who is still working, this is enough to say that they are not yet ready to quit! For someone who has stopped working, this is bad news. The tool would further say:
“The required corpus (cell B39) is too high. You may need to buy an annuity with your corpus at some stage in your life. Please consult a trusted SEBI registered fee-only financial planner, who charges a flat fee to review this case*”. Most advisors would also concur with this view and recommend an annuity with some stash for emergencies and a drastic reduction in expenses.
*The tool recognises that there are many grey areas in retirement planning, and a human advisor may be necessary for these. Whether they would do a better job or not is an unknown, though. Any user who appreciates commonsense should appreciate the results.
If the user is unhappy with these results, a DIY bucket strategy sheet is available to design their retirement bucket (not recommended at low corpus levels).
(c) Suppose the user has assets of about three crores; then the tool is finally happy and outputs a retirement bucket strategy. This means the user is ready to retire.
This is a snippet of the full message. All return assumptions can be varied. In addition, there is a DIY bucket strategy sheet available.
| Retirement Buckets | Amount to be invested in each bucket |
| Income bucket (100% liquid fixed income) to provide income in retirement with a return of 6 % p.a. This will ensure income for the first 15 years in retirement | 1,19,05,373 |
| low risk bucket with 50 % fixed income (rest equity) expeced to grow at a rate of 9 % p.a. | 73,13,253 |
| medium risk bucket with 30 % fixed income (rest equity) expeced to grow at a rate of 9 % p.a. | 53,03,464 |
| High risk bucket with 0 % fixed income (rest equity) expeced to grow at a rate of 10 % p.a. | 39,77,910 |
Thus the robo tool can be used to judge how soon a user is ready to retire by changing the retirement age and current asset and income sources.
Video Guide
How to use the Robo Advisory Tool to check if you are ready to retire
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