What return should I assume when planning for retirement?

Published: January 31, 2024 at 6:00 am

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:


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  • 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.

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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, 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.
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