How Systematic Withdrawal Plan (SWP) from a mutual fund can be a good option for pension income ?

Systematic Withdrawal Plan (SWP) from a mutual fund can be a good option for creating a pension-like income stream in retirement. Let’s understand how that is possible and financially viable. 

Systematic Withdrawal Plan (SWP) is a facility offered by mutual funds that allows investors to withdraw a specific amount of money from their mutual fund investments at regular intervals. SWP is essentially the opposite of a Systematic Investment Plan (SIP), where investors regularly invest money into a mutual fund.

Here’s how SWP works:

• Investment: Initially, an investor must have a certain amount of money invested in a mutual fund scheme.
• Withdrawal Amount: The investor specifies the amount they want to withdraw and the frequency (monthly, quarterly, half-yearly, or annually) at which they want to receive these withdrawals.
• Redemption: The mutual fund will redeem the specified amount of units from the investor’s mutual fund holdings at the prevailing Net Asset Value (NAV) on the chosen withdrawal date.
• Transfer of Funds: The withdrawn amount is then transferred to the investor’s registered bank account.

SWP can be a useful tool for investors who want to generate a regular income stream from their mutual fund investments. It’s often used by retirees or individuals looking to supplement their income. SWP allows investors to maintain an investment in the mutual fund while receiving periodic payouts. However, the sustainability of SWP depends on the performance of the mutual fund and the chosen withdrawal amount.

It’s essential to understand that the tax implications and specific terms of SWP can vary based on the mutual fund scheme and the prevailing tax regulations in your country. It’s advisable to consult with a financial advisor or tax expert to determine the most suitable approach for your financial goals and tax situation.

Systematic Withdrawal Plan (SWP) from a mutual fund can be a good option for creating a pension-like income stream in retirement for several reasons:

• Flexibility: SWP allows you to determine the withdrawal frequency and amount, providing you with flexibility in managing your income in retirement. You can tailor the SWP to meet your specific financial needs and adjust it as circumstances change.
• Investment Diversification: By using SWP, you can keep your money invested in a diversified portfolio of mutual funds, potentially benefiting from market returns over the long term. This is different from traditional pension plans, which may offer fixed payouts and limited investment options.
• Professional Management: Mutual fund investments are managed by professional fund managers, which can help you benefit from their expertise in making investment decisions. This is in contrast to self-managed retirement investments, which might require more active involvement.
• Liquidity: Unlike some pension plans that lock in your money with limited access, SWP provides liquidity, allowing you to access your funds when needed for emergencies or unexpected expenses.
• No Maturity Date: SWP doesn’t have a predefined maturity date, which means you can maintain the investment for as long as you want, potentially allowing your wealth to grow and provide income for an extended period.
• Tax Efficiency: Depending on the prevailing tax regulations in your country, SWP may offer tax advantages, especially if you hold investments for an extended period. It’s important to consult a tax advisor to understand the tax implications and make tax-efficient withdrawals.
• Inheritance: If you pass away, any remaining investments in your mutual fund can be inherited by your beneficiaries, providing a potential legacy for your loved ones.

However, there are some considerations to keep in mind when using SWP as a pension plan alternative:

• Market Risk: The value of your investments can fluctuate with market conditions. Therefore, you may need to carefully manage your withdrawal rate to ensure your investments last throughout your retirement.
• No Guaranteed Income: SWP doesn’t provide a guaranteed income like traditional pension plans. You must rely on the performance of your investments, which can vary over time.
• Regular Monitoring: You’ll need to actively manage your SWP to ensure it aligns with your financial goals, taking into account market conditions, your changing needs, and any necessary adjustments to withdrawal amounts.

In summary, SWP can be a good option for a pension-like income plan, offering flexibility, investment diversification, and the potential for long-term growth. However, it’s crucial to assess your individual financial situation, risk tolerance, and goals, and consider consulting with a financial advisor to create a retirement income strategy that suits your needs.

Now lat us understand how regular investment in mutual fund through SIP can become a very huge amount, which further can be invested for Systematic Withdrawal Plan (SWP) to get monthly income just like monthly pension. 

If we see the historical data of a good mutual fund, we find that on an average there is annual return of around 15%. To appreciate return of top 10 good performing mutual funds one can go through the blog on this topic.  If Rs.10,000 per month is invested in such a mutual fund through SIP for a continuous period of 25 years, then the total amount will become Rs. 3,28,40,737. You can calculate growth of your fund on any SIP calculator 

If the investor opts for systematic withdrawal plan by investing this amount into a fund which again earns 15% annually,  and he decides to withdraw suppose Rs.4 lakhs per month for the next 20 years, then also this is very much possible and at the end of the 20 years he will still have  Rs. 1,21,39,665 as balance in his fund to fulfil his other needs.

The SIP amount of Rs. 10,000 per month is scalable and the benefits will be in the ratio of investment amount.

None of the existing pension plan in the market can match such kind of huge return to the investor. However since the fund is invested in equity market there is always a risk and kind of uncertainty. But if we analyze the return generated by the equity market through historical data, we find that 15% annual return is very much possible and in fact practically generated by many reputed fund houses.

This investment scheme can be taken by any person as per his financial condition, however specially the young people joining their job or doing some business should certainly consider to take such investment plan for their secure future.