Building a retirement corpus is an important financial goal for many salaried individuals. However, accumulating a large corpus is only one part of retirement planning. Once the money has been accumulated, investors also need to plan how they will use it to meet their regular expenses.
A systematic withdrawal plan (SWP) can help investors generate a regular cash flow from their mutual fund investments.
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Under an SWP, a fixed amount is withdrawn from the investment at regular intervals by redeeming the required number of mutual fund units. The withdrawal amount and frequency can be selected according to the investor's requirements. The withdrawn amount is then transferred to the investor's bank account.
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What Is A Systematic Withdrawal Plan?
An SWP is a mutual fund facility that allows investors to withdraw money from their investment at regular intervals. Investors can choose the amount, frequency and date of withdrawal based on their financial needs.
For example, an investor with a Rs 1 crore corpus could set up a monthly SWP to create a regular income stream during retirement. Since the remaining money stays invested, the corpus continues to participate in market-linked returns.
However, SWP returns are not guaranteed. The actual performance of the investment will depend on market conditions and the returns generated by the underlying mutual fund. Investors also need to consider the impact of withdrawals during periods of market volatility.
How Does An SWP Work?
Consider an investor who has accumulated a Rs 1 crore corpus and wants to use it to generate retirement income for 30 years.
Suppose the investor starts with a monthly withdrawal of Rs 25,000, with the withdrawal increasing by 6% every year to account for inflation. If the investment generates an assumed annual return of 10%, the SWP could work as follows:
Investment: Rs 1,00,00,000.00
First monthly SWP: Rs 25,000
Annual increase in withdrawal: 6 %
Last monthly SWP: Rs 1,35,459.70
Assumed annual return: 10%
Duration: 30 years
Total Withdrawal: Rs 2,37,17,456.11
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Benefits Of A Systematic Withdrawal Plan
Flexibility: An SWP allows investors to choose the withdrawal amount, frequency and date according to their financial requirements. Investors also have the option to modify or stop the SWP at any time, make additional investments when required or withdraw any amount from investment over and above SWP withdrawals.
Regular cash flow: An SWP can provide a regular income stream from mutual fund investments, which can be useful for meeting your expenses.
No TDS on SWP: Mutual fund houses generally do not deduct TDS on SWP withdrawals.
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