A retirement planning calculation is defined by its inputs and assumptions. This article discusses what portfolio return we should assume while planning for retirement.
A return has little meaning as it has to be benchmarked to inflation. Also, we should not forget to factor in taxes. Another common mistake investors make while planning is using their expected equity return for the entire portfolio return.
A portfolio is a mix of equity and debt (gold for some). So the net portfolio return after tax will always be lower than the return we expect from stocks or equity mutual funds. Also, the equity allocation (if high) will have to be lowered in future. This will also reduce the expected portfolio return. See, for example, the freefincal robo advisory tool output here: I realized the importance of retirement planning only at 35; is there any hope for me?
Return assumption before retirement:
- We recommend using inflation of at least 7%
- Initially, while starting the journey, you can use a post-tax overall portfolio return of about 10%. That is a real return of about 3%. This is not practical, but it would demotivate many as realistic numbers would mean the investment to be made is quite high.
- Once you get experienced, and your corpus has grown, you can reevaluate your expectation and lower the real return to about 2% or even lower if you can handle the investments.
- On the other hand, if you choose to factor in equity reduction to handle the sequence of returns risk like the freefincal robo advisory tool does, a single return assumption is good for several years. Note: all retirement planning calculations should be redone yearly with fresh inputs regardless of the approach used.
Return assumption after retirement:
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
- We recommend using inflation of at least 5-6%
- The post-tax overall portfolio return assumption can be the same as inflation or slightly less. That is, expect no more than zero returns (after tax). When we are young, this might seem like a foolish assumption. Still, it begins to make sense as we age —beating inflation after retirement is hard and cannot be consistently done unless we risk capital and financial independence.
- A better approach is to focus on a bucket strategy where the corpus is divided into different buckets. The freefincal robo tool uses an income bucket, a low-risk bucket, a medium-risk bucket and a high-risk bucket as illustrated here: Retirement plan review: Am I on track to retire by 50?
- Naturally, a bucket strategy also will have return assumptions, but that is better than relying on a single return expectation to determine the corpus. Retirement buckets allow us to handle the risk of corpus depletion due to poor capital market returns, particularly in the first decade of retirement.
- For example, we can plan for enough funds in the income bucket to provide an inflation index for the first 15 years of retirement. We can increase the margin of safety with the help of a single annuity – Creating the ideal retirement plan with income flooring!
- Or with multiple annuities: Use this annuity ladder calculator to plan for retirement with multiple pension streams
In summary, there is more to retirement planning than using a single real return before and after retirement. The planning is a lot more nuanced. We need to factor in the systematic reduction in equity before retirement and a bucket strategy supported with one or more annuities after retirement.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
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.
- 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 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
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 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!
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
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published 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
This 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
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)