Retirement planning is a vital aspect of one’s financial goals that an individual needs to plan early in his life. Retirement planning, however, doesn’t only mean creating a corpus but also how you can withdraw from it for your expenses optimally, with the help of SWP.
Anup Bansal, Chief Investment Officer, Scripbox, says, “With the help of a Systematic Withdrawal Plan (SWP), as an investor, one gets the option to withdraw a fixed sum of money from a fund at regular intervals. It is just the opposite of a Systematic investment plan (SIP).”
How does it work?
As an investor, you need to invest a lump sum amount firstly in a fund. You can then opt for transferring a fixed amount from the funds invested at regular intervals through SWP.
Simply put, through this method, you invest a corpus first to withdraw a fixed monthly amount later.
According to experts, through SWP, investors get protection from market instability and also avoid timing the market.
For people who have retired or are senior citizens, or who are looking for a fixed flow of income and wish to get a monthly income for daily expenses, SWP is an ideal option.
Bansal says, “In my opinion, the Systematic Withdrawal Plan (SWP) can be a great option in retirement planning.”
Here are some factors to consider for using the SWP option;
Be mindful of the withdrawal rate: SWP lets you withdraw a certain percentage or a certain amount every month/quarter/annual. “The withdrawal rate should be enough to cover one’s expenses. One can revisit their cash flow requirements on a periodic basis due to changes in lifestyle, life goals and inflation,” adds Bansal.
Save tax with SWP: When using the SWP option, the tax incidence is much lower as compared to a fixed interest-bearing instrument as tax is levied on the gains of the units withdrawn.
Table: Comparison of tax incidence between a Fixed Deposit and Debt Mutual Fund with SWP option. (This is for example purpose only with certain approximations and not indicative of actual returns.)
Corpus | Rs 1 | Cr |
Return | 6% | |
Withdrawal per month | Rs. 50000 | |
Tax slab rate | 10% | |
Fixed deposit tax | Rs. 5000 | (10%*50k) |
Debt mutual fund tax | Rs. 290 |
Better planning of cash flow: You have the authority on when you want to withdraw the amount (frequency) as per your income vs expenses. Bansal explains, “This provides clarity on how to budget for one’s family better.”
As an investor, if you don’t withdraw the amount all at once, you also get the benefit of compounding–allowing wealth creation.
He further adds, “SWP for retirement is a great option. The prerequisite is to build a large sum that you can rely on for the latter time.”