How to plan your retirement with SWP

According to statistics from the World Health Organization (WHO), India’s healthy life expectancy at birth has increased by 4.02 years from 54.1 years in 2000 to 58.1 years in 2021. With the average lifespan increasing, it’s crucial to secure yourself a financially sound future during your golden years so you can retire worry-free. The money you save should be able to support a similar lifestyle to when you were working and provide some cushion for medical emergencies.

A well-structured retirement plan and the right investment strategy can ensure you achieve this goal and have a comfortable retirement life. In the latest edition of Mint Money Shots hosted by Invesco Mutual Fund, Mint’s Assistant Editor Aprajita Sharma talks about how Systematic Withdrawal Plans (SWPs) can be a powerful tool for planning for retirement. A SWP allows you to smartly manage your superannuation while earning a stable income and minimizing your tax liability. Watch the full episode below,

As the name suggests, SWP allows you to withdraw a fixed amount from your mutual fund investments at regular intervals – you can choose monthly, quarterly or yearly intervals. By doing this, SWP can serve as a flexible way to turn your investment into a steady stream of income during your golden years (the stage of life when you may need it most).

Get a steady stream of income and save on taxes

“SWP provides retirees with the dual benefits of regular income and tax efficiency. Whether you are withdrawing funds for living expenses or any other needs, SWP can provide stable cash flow while ensuring that your retirement savings last longer.

This dual benefit is a boon for retirees, who can adjust withdrawal amounts to meet their financial needs while keeping some of their money growing. According to financial experts, SWPs help retirees withdraw funds in a structured manner, providing a reliable source of income without depleting the portfolio too quickly. “One of the main benefits of SWP is tax efficiency. When you withdraw the amount, the money withdrawn will be divided into two parts: capital and gain. The gain part is taxable, while the original investment remains tax-free. This makes SWP more tax efficient ,” she explained.

Flexible withdrawal amounts

How much money will you need each month to meet your daily expenses in retirement? As inflation rises, your expenses will increase over time. SWP addresses this issue by offering the flexibility to adjust withdrawal amounts periodically to ensure you have enough funds to keep you comfortable even as costs rise.

“To manage market risk and ensure your money lasts until retirement, financial advisors often recommend a bucketing strategy. This strategy divides your retirement coffers into different types of funds based on the level of risk,” Sharma said.

To explain further, she shared a case study in which a man distributed his Rs. The retirement information of Rs 2 Crore was divided into three different buckets – $60 Lakhs in debt or hybrid funds, 30% of the principal and another $6 million rupees for equity funds, which also account for 30% of the main body, and the rest $80 Lakhs fully equity fund, 40% of pension.

“Start out of lower-risk funds first, then move into equity funds when they have time to grow. This protects you from immediate withdrawals due to market fluctuations while allowing your equity investments to compound over time. It is recommended to start planning your SWP strategy two to three years before retirement. Doing so will allow you to structure your investments to optimize taxation and ensure your superannuation is ready to generate inflation-adjusted income. Proper planning ensures you do so. Withdrawals last throughout your retirement.

Get the most out of your SWP

In India, where investments are subject to varying market conditions and inflation rates, one-size-fits-all withdrawal methods, such as the popular 4% rule, are not a wise choice.

“According to investment experts, it’s important to customize your SWP based on your lifestyle, inflation and expected returns, rather than following a blanket set of rules. A personalized SWP with professional guidance can help ensure your corpus lasts while Maintain your quality of life,” she said.

It is equally important to choose the right fund type to maximize your SWP investment returns. You can choose a balanced or equity savings fund that offers both growth and stability. If you want to reduce your risk even further, you might also consider multi-asset funds that diversify across stocks, debt and commodities.