After retirement, the biggest question is where the money will come from every month. Most people consider FD i.e. Fixed Deposit to be the safest option, but there is another method which can be more beneficial than FD and that is SWP i.e. Systematic Withdrawal Plan. In SWP, you invest your money in a mutual fund and then withdraw a fixed amount every month from that money which gives you regular income. The most important thing is that the money you do not withdraw remains in the fund and keeps growing over time.
SWP i.e. Systematic Withdrawal Plan works in the opposite way to SIP i.e. Systematic Investment Plan. In SIP you invest money every month whereas in SWP (Systematic Withdrawal Plan) you withdraw a fixed amount every month. When you start an SWP, you do not withdraw the entire money from the mutual fund at once. Rather, every time a small number of units are sold and that much money comes to your bank account. The remaining money remains invested and also gives returns.
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What is the difference between FD and SWP?
In FD the money is locked at a fixed price but in SWP your money remains invested in equity or hybrid funds. If the fund gives 12% returns and you are withdrawing 8% annually, your corpus will keep growing by 4% every year. This means that even after 10 years you will have more money than in the beginning. SWP is also ahead in terms of tax, the interest received on FD gets added to your income and is taxed as per your tax slab. If you are in the 30% bracket, the actual return on a 7% FD comes down to just 4.9%. Whereas in SWP, only the capital gains portion is taxed and not the entire amount withdrawn.
How much money can I get every month?
If you have Rs 50 lakh and the fund is giving 10% returns, you can withdraw Rs 25,000 every month and even after 20 years you will be left with Rs 95 lakh. To earn Rs 50,000 per month, an investment of around Rs 70 to 80 lakh is required, assuming an average return of 8 to 10%. The general rule is that annual withdrawals should not exceed 6 to 8% of your corpus. For example, the safe annual savings on Rs 50 lakh is Rs 3 to 4 lakh, i.e. Rs 25,000 to Rs 33,000 per month. The 4% rule says that not more than 4% of the retirement corpus should be withdrawn every year, so that the money lasts till retirement.
Advantages of SWP
SWP gives you a fixed amount every month, three months or annually, just like a salary. This is very useful after retirement or when the income stops. Along with this you also get complete freedom. You can change, pause, or resume withdrawal amounts at any time. This flexibility is not available in any pension or annuity.
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What are the risks of SWP?
SWP is not completely risk free. SWPs have market risks; if the markets fall and you are withdrawing more, the corpus can dwindle quickly. The biggest risk is that if the markets remain down for a long time and the savings are high, your money may run out sooner than expected. Therefore, it is wise to start an SWP only after taking advice from a financial advisor.
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