That's right.

In this article, we will look at how we can use a Systematic Withdrawal Plan (SWP) as your income stream after retirement.

What is SWP?

Do you invest in mutual funds through SIP?

Then you understand how mutual funds work. You invest a specific sum of money every month and the fund manager invests your amount in different securities as per the fund's objective.

SWP is just the opposite of SIP. While in SIP, the amount is debited from the bank account and invested in the fund, in SWP, the amount moves from the mutual funds to your bank account.

Hence, it can be used as an income stream after your retirement.

How SWP Work?

During your working years, you can invest money in different investment options such as mutual funds regularly through SIP. Later, when you are closer to your retirement, you can transfer most of your accumulated amount to a debt mutual fund.

It is best to set up SWP in a debt mutual fund such as Ultra Short Duration Funds that is relatively stable than other funds because you wouldn't want your savings to be prone to the high short-term volatility that is typically associated with equity funds.

Now, you can set up an SWP in a debt fund or a conservative hybrid fund and a fixed amount of money would be transferred from your mutual fund to your bank account. This way, you get regular payouts while your remaining investment continues to grow.

For example, if you have Rs. 1 crore in a mutual fund and decide to withdraw ? 25,000 every month, you'll receive that amount regularly. At the same time, the rest of your money stays invested, potentially earning more returns.

If the remaining amount in your mutual fund grew at a conservative 8% returns for 25 years, you would get ? 75 lakhs as a pension and your corpus would have grown to ? 4.5 crores.

This approach helps in managing monthly expenses without depleting your entire savings quickly.

Typically, it is suggested that investors redeem 4% or less of the retirement corpus so that the retirement corpus doesn't run out during the lifetime.

Good to Know: Bill Bengen, a financial advisor is attributed with the 4% withdrawal rule. In the mid 1990s, he used historical data of stocks and bonds performance over the 50-year period from 1926 to 1976 to arrive at the figure.

Benefits of SWP for Retirement Income

Get a Steady Income Stream

The main benefit of SWP is that provides a steady income as per your required intervals. It can just act like a reliable paycheck after your retirement which can make it much easier to manage monthly expenses. Want to increase your SWP amount? You can increase and decrease the SWP amount without any hassle. This brings us to the next benefit.

Flexibility

You can choose how much money you want to withdraw and the required interval. This way, you can adjust your withdrawals based on your needs and financial goals.

Consult your tax advisor for understanding tax implications in detail.

Maximize Tax Efficiency

As a retired individual, looking at the tax efficiency of different investment options is very important. When you opt for SWP, the withdrawal is considered as a redemption and hence it will attract the applicable taxes on the gains.

In traditional savings options, the interest generated on the entire corpus during the year is added to the income and taxed according to the tax slab.

In the traditional savings options, tax is applied even if the amount is not withdrawn. However, in mutual funds, the taxes are applicable only at redemption. Hence, the tax on SWP redemption is lower than traditional saving options.

The Rest of the Amount Continues to Grow

The beauty of SWP is that while you redeem a portion of your accumulated amount, the rest of your corpus continues to grow.

For instance, let us consider that you have ?2 crore in your retirement kitty. You are looking to redeem 6% of the corpus every year which comes around ?1 lakh per month. We are expecting that the accumulated amount will grow by an average of 8% (a very conservative figure) for 20 years after retirement. In this case, you would have redeemed ?2.4 crores over 20 years and you would still have ? 3.92 crores in your retirement kitty. That's the sheer power of compounding. You can keep this amount for your children, donate or use it during your lifetime.

Here's a snapshot: Product to confirm

We can have source which is similar in our SWP ppts.

https://https//www.barodabnpparibasmf.in/calculators

However, it is important to understand that it is a very simplistic example as we are not considering inflation in this example.

How to Set Up SWP

Here are three steps that you need to follow to set up SWP for your post-retirement needs.

Choose the Right SWP Mutual fund:

The first step that you need to do is select the right mutual fund for SWP. We have earlier discussed that the best mutual fund for SWP is a fund that is relatively stable. This is because the main objective of such a fund should be capital protection.

Debt mutual funds are generally considered for setting up SWP. There are different types of debt funds as well. As an investor, you need to select the fund that matches your risk tolerance and investment horizon.

Set Withdrawal Amounts: Next, you need to decide how much money you want to withdraw periodically. A common thumb rule is to withdraw 4-6% to be checked of your total investment annually so that you get a steady source of income and don't deplete your retirement corpus.

However, the SWP amount will vary from person to person and it will mostly depend on your requirements.

Use Systematic Withdrawal Plan Calculator

You can use an online SWP calculator if you want to calculate the amount of money that you need to redeem every month. These calculators can show you how long your retirement corpus will last or the amount that you will have by the end of your expected life expectancy say 80 or 90 years.

Conclusion

Overall, planning for your retirement expenses is no child's play. Hence, you need to consult a mutual fund advisor who can help you choose the right mutual funds for SWP and the SWP amount. Moreover, they will also look at creating a tailored plan that works for you and review it regularly.

Disclaimers

The above is only for understanding purpose and shouldn’t be construed as investment advice provided by the AMC. Past performance may or may not be sustained in future. Consult your financial/tax advisor before taking investment decisions. The % of return, if any, mentioned in this article will depend upon various factors including the tenure of investment, type of scheme, prevailing market conditions, view of Fund Manager on the market etc.