Review Your Financial Freedom Portfolio in Seven Easy Steps

Published: April 19, 2016 at 6:04 am

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. Here are seven easy steps to review the health of your financial freedom or retirement portfolio. First posted on Mar 25 2014, now republished with updates.

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.

You can either use this monthly Planner or the goals analysis sheet of the automated mutual fund and financial goal tracker to automate this review process. The examples given are for illustration only.

  1. 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.
  2. 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!

  1. 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 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 for about 10-11 years. Whereas I would need a corpus that should support me for 20-25 years!

  1. 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.
  1. 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 need 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 not too much higher the initial monthly investment planned, things are reasonably fine.

 * take all the transactions (purchases, dividends, redemptions, switches, reinvestments etc.) made for a financial goal, feed them into an XIRR calculator and compute the CAGR (the goal tracker sheet of the automated mutual fund and financial goal tracker does this at a click of a button). Of course, other portals like VR, perfios do this automatically but, .. ahem lack goal analysis capabilities like …

  1. 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 not significant break or reduction in contributions due to lay offs or lesser paying jobs.
  1. 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 financial freedom calculator 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 the automated mutual fund and financial goal tracker automates this review process. Just remember to view it occasionally and not every day!

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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