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How much portfolio return do you need over your lifetime to meet all your goals?

Posted on 07 Apr 2024
Author: Sayan Sircar

Tags: Portfolio Construction ; Calculator

4 mins read
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This article shows the calculation for your portfolio’s lifetime XIRR which allows you to meet all your goals.

How much portfolio return do you need over your lifetime to meet all your goals?

📚 Topics covered:

What is the concept of lifetime portfolio return?
How is the return calculated?
What does this number look like in real life?
How to interpret the number?

What is the concept of lifetime portfolio return?

A portfolio, as we have discussed many times before, has the single purpose of providing you with money to spend on goals like:

retirement when you no longer have income
buying a house for living and investment
cover the education expenses for your children
fulfil dreams like vacations, cars and lifestyle

For this to happen, you invest from your family income. External income like inheritances also gets invested.

The overall investor-to-portfolio relationship looks like this:

Portfolio Cashflows

Here we see that the investor gives money to the portfolio (which we will consider with a negative sign). In contrast, the portfolio creates returns (with a positive sign).

With this understanding in place, we can now calculate returns.

How is the return calculated?

We will use the IRR function provided in both Excel and Google Sheets to calculate this:

Year	Investment	Return	Net Cash Flow	Comment
1	-5.00	3.00	-2.00	Earning phase
2	-5.50	0.00	-5.50	Earning phase
3	-6.05	2.00	-4.05	Earning phase
4	-6.66	0.00	-6.66	Earning phase
5	-7.32	0.00	-7.32	Earning phase
…	…	…	…	…
30	0	30.00	30.00	Retired
31	0	32.10	32.10	Retired
32	0	34.35	34.35	Retired
33	0	36.75	36.75	Retired
34	0	39.32	39.32	Retired
…	…	…	…	…

To get the lifetime portfolio return, we will apply the IRR function on the “Net Cash Flow” column since these are annual numbers. You can do this exercise with monthly numbers also, but then you will have to use the XIRR function.

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What does this number look like in real life?

Calculation of SIP amount for multiple goals

If you are using our goal-based investing calculator shown in the above screenshot, your lifetime portfolio return is available in the dash tab:

Lifetime Portfolio XIRR

How to interpret the number?

Many investors, when they create their portfolio, look for the best-performing investments: best mutual funds, best stocks and other “only-the-best-will-do” investments. However, the lifetime return needed from their portfolios is bounded by their asset allocation and the rebalancing plan.

Note: The IRR calculation uses Google Sheets’ own IRR function. If you get strange numbers, as some users have reported, please copy range io!L3:L102 (from the hidden “io” sheet) to Excel and apply IRR in Excel.

We have already shown before that it is very difficult to beat inflation at a total portfolio level.

Our IRR calculation shows the same result. Depending on the goals you have, your portfolio return does not need to be very high. In such cases, there is no need to take an excessive amount of risk. For example, if you have planned it that way, a small amount of risk, via safe investments like PPF may be enough for your children’s goals:

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Next steps:

1. Email me with any questions.

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