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What is Systematic Withdrawal Plan? Learn why this is best for the retirees

Systematic Withdrawal Plan: Best for retirees

Systematic Investment Plan (SIP) is a popular tool for investing in mutual fund schemes. However, you may not be aware that Systematic Withdrawal Plan (SWP) is equally efficient for generating regular income. With SWP, you can select the withdrawal amount, frequency, and duration according to your needs, and the money will be automatically transferred to your bank account. 

SWP proves to be an effective tool for earning consistent income after retirement, especially if you have regularly invested and accumulated a substantial corpus in the years leading up to your retirement. Retirees can utilize their retirement savings, gratuity, and corpus to opt for SWP by choosing suitable mutual fund schemes.

Features of SWP

While SWP provides a steady flow of income, the remaining investment in the schemes continues to grow, contributing to the expansion of your corpus. While SIP evens out the cost of purchasing mutual fund units, SWP balances the cost of withdrawals. However, it’s crucial to remember that there’s no guarantee that your capital will remain intact indefinitely. If your rate of withdrawal exceeds the growth rate of your investment, you may end up depleting your capital. Therefore, conservative investors should ensure their retirement investment portfolio includes Fixed Deposits and Senior Citizens Savings Schemes while using SWP in mutual funds as an add-on.

Determining the Withdrawal Amount

For SWPs, having a large corpus, realistic return assumptions, and a withdrawal rate lower than the assumed return is considered optimal for receiving monthly cash flows. To preserve your corpus, the rate of withdrawal should be lower than the average return potential of the investment products. Experts suggest an annual withdrawal rate of 4%-6% per annum to avoid eroding your capital.

A rough calculation indicates that an optimal withdrawal rate for short-duration funds is 6% per annum, while it increases to 8% for hybrid and equity-oriented schemes with a tenure of 10 years. Please note that this study doesn’t account for inflation. Equity-oriented schemes can be suitable for SWP if you have a high-risk appetite and a longer withdrawal duration. It’s crucial to consider market conditions when investing lump sum amounts in equity funds, and it’s best to consult your financial advisor before making such decisions.

Taxation Rules

SWP redemption follows the first-in-first-out (FIFO) method, where the units bought first are assumed to be redeemed first. For equity funds, there is a 10% long-term capital gain tax on gains exceeding Rs 1 lakh, provided the investment was held for more than a year. If the investment was held for less than one year, a 15% short-term capital gain tax is applicable.

In a nutshell, SWP is a novel product that ensures retirees can enjoy their post-retirement life with the same level of comfort they had during their working years. However, to make SWP work effectively, it is essential to have a well-planned SIP in place as well.

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