Systematic Withdrawal Plans: Can SWPs be the key to a secure retirement income?

Several wealth planners are pitching Systematic Withdrawal Plans (SWPs) as a smarter and tax-efficient way to withdraw money from mutual funds. The route is even being touted as a better alternative to fixed deposits for steady income. Here’s a look at how they work, along with the advantages and risks involved.

WHAT IS A SWP? HOW DOES IT WORK?

It is a way to get a regular income from your mutual fund investment. You can choose a fixed amount and frequency of withdrawal — monthly, quarterly, or yearly — from a scheme. The fund automatically sells the corresponding units and sends them to your bank account. The rest of your money stays invested. HOW DIFFERENT IS SWP FROM A SIP? SWP is just the opposite of Systematic Investment Plan (SIP). In SIP, you invest money regularly, while in SWP, the money is withdrawn systematically to create a steady income stream.

WHY WEALTH PLANNERS ARE INCREASINGLY PUSHING FOR SWP?
Several investors are increasingly allocating money to equity mutual funds every month as part of their retirement corpus. But, withdrawing a huge corpus during retirement results in a big tax outgo in absolute terms. SWP is a more tax-efficient way compared to bank fixed deposits that allows withdrawal from these schemes, while allowing the rest of the corpus to keep growing

HOW MUCH SHOULD YOU WITHDRAW VIA SWP EVERY YEAR?

Most retirement planners advise a maximum withdrawal rate of 3.5% to 4% every year. So, for a `50 lakh corpus invested in an equity mutual fund fetching annual returns of 8%, you will get about `1.75 lakh to `2 lakh every year (pre-tax returns) from the fund. This is roughly `14,600– `16,700 a month. Wealth advisors said that at this withdrawal rate, the corpus would last for over 30 years. This calculation does not factor in the impact of inflation and taxes, which can significantly impact real returns.

WHAT CAN GO WRONG IN SWPS?
SWPs look good on paper, but their success hinges on the performance of the stock market. For SWPs to work well in an equity scheme, the market should be in a steady uptrend. If the stock market enters a lengthy phase of low returns or a bear phase, the withdrawal rate could outpace the fund returns. This means the corpus would drain out faster than expected