Ensuring a Secure Retirement Through Systematic Withdrawal Plans
SWP is a good option to help maintain a regular stream of income while ensuring the unused funds continue to grow with time
Planning for sufficient funds once you have no income source is probably one of the most daunting aspects of retirement. A systematic withdrawal plan(SWP) is a good option to help maintain a regular stream of income while ensuring the unused funds continue to grow with time.
A systematic withdrawal plan is a feature that allows you to make regular withdrawals of a fixed amount from your mutual fund investments. You also have full control on the amount and frequency of withdrawals. For instance, consider a corpus of Rs. one crore growing at 11 per cent. Even if you make monthly withdrawals of Rs 40,000 for 20 years, you would be left with approximately Rs 96 lakhs despite having withdrawn Rs 96 lakhs.
Diversify Investments to Account For Inflation and Adjust Risks
Says Mr. Harsh Gahlaut, Co- founder and CEO, FinEdge, a digital wealth management firm, “Inflation is the silent devil and often overlooked. Not accounting for it while planning for retirement can be detrimental.” Investing across asset classes with about 35 per cent in debt mutual funds, 15 per cent in fixed instruments and 50 per cent in equity mutual funds, would help balance the risk while generating regular income for you.
Says VLA Ambala, Co-Founder, Stock Market Today, a trading and research platform, “SWPs could help you build an inflation-adjusted retirement corpus. Investing in diverse assets that have growth potential, like equities, and predictable income, like bonds, can increase your chances of beating inflation.”
Tax Planning
Strategically planning your withdrawals can significantly reduce tax liabilities. Long term capital gains (LTCG) up to Rs one lakh from equity funds are tax-free. By spreading withdrawals to leverage this benefit you can maximise your gains while minimising tax impact.
How to Ensure You Don't Run Out of Funds
Taking a conservative approach to asset allocation in the pre-retirement phase will lead to a smaller retirement corpus. Remain disciplined towards asset allocation to generate enough growth in your portfolio to outpace inflation.
Says Siddharth Alok, AVP Investments, Multi Ark Wealth, an investment advisory, “As a rule of thumb, keep your withdrawal rate at less than four to five per cent. As you are without any inflows but expenses continue to mount, keep return expectations low and invest in a disciplined manner.” As you withdraw, finding ways to invest more would help maximise savings while ensuring regular income for a longer duration.
In the post-retirement phase, it is as important to not become too conservative as this would result in suboptimal returns. If you remain too conservative you will run the risk of exhausting your corpus prematurely.
Says Gahlaut, “Contrary to popular belief, it is crucial to take informed risk and to maintain a significant allocation of equity.” By shifting your entire wealth into debt or fixed income investments you lose out on returns and will not be able to keep pace with inflation. This could trigger a premature exhaustion of your funds.
