What return should a 30Y old use when planning for retirement?

Published: January 23, 2022 at 7:00 am

Last Updated on February 12, 2022 at 6:26 pm

Suman asks, “Sir, What return should I use while planning for retirement? I wish to retire by age 50. I am currently 30 years of age”.

Many people make two mistakes while planning their finances. The most common mistake is to assume equity mutual funds offer a 12% return and use that to compute the investment amount required. Unfortunately, this completely ignores asset allocation and the fact that one cannot invest 100% in equity.

Even those who take into account asset allocation, assume that the same weightage of equity and fixed income will persist until the need arises.

We must appreciate that the asset allocation will not remain fixed in time. For example, the 30Y old can start investing 60% in equity and 40% in fixed income.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

This ratio should not remain the same until he hits 50. That would be like leaving the fate of his hard-earned money in the hands of luck. In order to combat unknown market returns (aka sequence of returns risk), the equity allocation must be continuously tapered throughout the investment journey.

Also, return expectations vary with inflation. In the early 2000s assuming a 15% equity return for “long term goals” seemed reasonable. Today 12% seems high! See: Ten year Nifty SIP returns have reduced by almost 50%

Considering taxation and lower inflation estimates over the long term, we recommend using 9-10% post-tax returns for equity. Many people are shocked by this. They say, “why should I invest in equity if I am going to get only 9-10%?”

The answer is, fixed income returns are also proportionately decreasing and will continue to fall over the long term even though there are some spikes due to inflation (and elections!).

So we recommend using not more than 7% from fixed income (even if tax free!) and 6% if the product is taxed.

So for a 60% equity and 40% fixed income mix, the expected portfolio return (approximately) is (60% x 10%) + (40% x 7%) ~ 9% (approx). This is only the initial asset allocation and return expectation.

The freefincal robo advisory tool auto-generates the recommended asset allocation values at different stages of the investment journey. The user can change all assumptions (returns, inflation etc.) The plot for a 30Y old wishing to retire at 50 is shown below (left image).

Screenshot from the freefincal robo advisory template showing the suggested asset allocation and change in assumed portfolio return
Screenshot from the freefincal robo advisory template showing the suggested asset allocation and change in assumed portfolio return

The equity allocation starts at 60% but starts decreasing gradually to 30% from the last 30s. This is to ensure the corpus is not affected by a prolonged stretch of poor returns.  This model has been extensively backtested to handle a wide variety of market fluctuations. See for example: Why Understanding Sequence Risk is Crucial for Investing Success! And this video.

This also means that the returns from the entire portfolio change. This must be factored into the investment amount needed from day one (which the robo tool does).

The full retirement planning illustration with post-retirement inflation-protected income generation via a five bucket strategy is available here: I am 30 and wish to retire by 50 how should I plan my investments?

In summary, an investor must never assume a single return value either from one asset class or the entire portfolio for the entire investment duration. The asset allocation and how it varies will determine how the returns vary. We recommend having conservative return expectations from both equity and fixed income.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr 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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 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 condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 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 who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
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 their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization 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: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)