Today, we’re discussing a compelling retirement income strategy: the Systematic Withdrawal Plan (SWP).
If you’re planning for a steady monthly income during retirement, an SWP can help you generate sustainable cash flow from your investments. While traditional options like fixed deposits (FDs) have limitations, SWPs from mutual funds offer a flexible and balanced approach, considering returns, risk, regular income, liquidity, and potential appreciation.
The Retirement Income Challenge:
Many investors haven’t considered how they’ll generate monthly income from their retirement savings. While FDs might seem like the obvious choice, their returns (6-7% pre-tax) are often low and carry reinvestment risk. Rates could decline significantly over a 10-15 year retirement.
Why SWPs? Addressing Investor Concerns:
When discussing SWPs, I often ask investors:
- “Do you like the returns from traditional products?”. Most say NO.
- “Then why invest in FDs?”. The common answer is safety. Although FDs are a common choice for safety, deposits are only insured up to ₹5 lakh per depositor per bank. Bank failures, like the recent closure of Charminar Bank in Hyderabad, do happen.
Many retirees gravitate towards traditional products due to perceived safety and a lack of awareness about alternate options. While traditional products offer safety, regular income, and liquidity, SWPs from hybrid funds can offer all of those with a certain degree of risk plus the potential for capital appreciation over the long term.
How SWPs Work?
Hybrid mutual funds, suitable for long-term investing, provide diversification across asset classes (debt, gold, equity). Balanced advantage funds, aggressive hybrid funds, and multi-asset allocation funds are ideal categories for SWPs, providing a mix of equity and debt with tax efficiency. Investors can choose the optimal allocation based on their investment needs and risk profile.
An SWP allows you to withdraw a fixed amount at regular intervals (monthly, quarterly), creating a predictable income stream for living expenses. This promotes financial discipline, preventing overspending and premature depletion of savings.
Some Examples of SWP with Corpus left (Capital Appreciation in Long term )
Assuming Investment in Equity Hybrid Funds and an average return of 11.12% p.a as per AMFI Best Practice Guidelines Circular No. 109-A /2024-25, Dated September 10, 2024. “Past performance may or may not be sustained in future and is not a guarantee of any future returns”
SWP and Inflation:
Retirement can last 25-30 years, so income needs to keep pace with inflation. SWPs can accommodate this by allowing for annual increases in withdrawal amounts.
SWP Benefits:
- Regular Income: Provides a predictable cash flow.
- Financial Discipline: Encourages responsible spending.
- Tax Efficiency: Can be more tax-efficient than interest/dividends for some investors.
- Potential Appreciation: Hybrid funds offer the possibility of growth.
- Peace of Mind: Reduces financial stress during retirement.
A Growing Trend:
While SWPs are still relatively new, they are poised to become as popular as SIPs in mutual funds.
BANK DEPOSIT SIZE in India is 212 lac Cr (Approximately 4 times of MF industry AUM), Source: SBI & RBI research Issue # 13, FY25 19-August-2024
Source: NJ Article
Regards
Jagdish Jha
Stock Market Trainer &
NISM Certified & AMFI Registered Mutual Fund Distributor
Call/Wapp-9730702102
Web: www.jagdishjha.com
Free SIP A/C & Goal Planning : http://p.njw.bz/26042