Retirement is meant to be relaxing – no deadlines, no boss, no early morning or late night meetings. But even after hanging up your boots, one thing that is inevitable are monthly expenses. With no monthly salary coming in, retirees often wonder: How do I ensure a regular cashflow without dipping into my savings too fast?
For retirees who do not have a traditional pension or rental income, there are very few options for generating dependable cashflows. That’s where the Systematic Withdrawal Plan (SWP) option of Mutual Funds can step in and help you create your own custom-made pension. In today’s blog, we understand how.
Understanding SWP: How does it Work?
Systematic Withdrawal Plan (SWP) is a withdrawal option offered by Mutual Funds that lets you withdraw a fixed amount of money from your investments at a regular interval — weekly, monthly, quarterly, or even yearly.
Let’s say you have invested ₹50 Lakh in a Low Duration Mutual Fund. You now create a plan to withdraw ₹30,000 each month. The withdrawal happens from your investments while your remaining investment keeps growing. Let’s see how your portfolio will look like over the months.
As you can observe, the withdrawal happens every year while the remaining portfolio keeps growing. As a result, you are still left with about ₹20 Lakhs of value after a period of 20 Years.
SWP is just like Pension Plans – But Better
Traditional Pension / Annuity Plans lock your money for your life and give relatively low returns.
For example, LIC’s Jeevan Akshay VII offers a monthly cashflow of ₹28,896 fixed for 20 years and then for life against ₹50 Lakh invested — which translates to about 3.5% XIRR considering 20 years of life expectancy.
While you get just a tad bit lower cashflow, the original amount of ₹50 Lakh is not returned after your death. If you want that option, the monthly cashflow drops to ₹21,771 — which is much lower.
With Low Risk Debt Mutual Funds, you can design a similar SWP with less capital as they offer higher returns while also protecting your capital.
Why is SWP Beneficial Over Traditional Pension Plans?
One of the biggest advantages of SWP through Mutual Funds is control:
- Want to change your monthly cashflow amount? You can.
- Need to stop/increase your cashflows temporarily? You can.
- Need your capital to stay as it is or even grow over years? You can.
- Need to withdraw some/full amount in case of emergencies? You can redeem anytime.
You remain the person in the driver’s seat — unlike pension plans that lock your money for life unless you surrender them (which is even costlier).
In case you want to leave the full corpus amount to your dependents after your death, you can even do that — just like traditional pension plans — by reducing the cashflow amount a little.
As per our earlier example, in case you want your portfolio to remain as is even after 20 years, you need to withdraw ₹29,000 and the portfolio should remain the same after 20 years.
Where Should You Invest for SWP?
For retirees, debt mutual funds are ideal for setting up SWP as they take low risk while offering stable returns.
Some ideal fund categories:
- Liquid Funds
- Ultra Short Duration Funds
- Low Duration Funds
For those who want to take a little bit of additional risk, Conservative Hybrid Funds can be considered — but make sure you stay invested for a few months before starting an SWP to avoid exit load charges.
Bonus: Beating Inflation with SWP
We understand that ₹35,000 today won’t buy the same things 10 years later. You would need a higher amount every year to maintain your purchasing power.
Unlike traditional pension plans that offer only 3% simple interest increase each year via a special option, you can increase your SWP amount anytime — by either starting a new SWP or by modifying your existing SWP.
You may need to invest a higher amount or withdraw a lower amount initially in case you need to retain your portfolio.
Taking our earlier example:
If you want to be left with about ₹50 Lakhs at the end of 20 years and increase the SWP amount by 5% every year, you would need to invest about ₹79 Lakhs or withdraw ₹20,000 in the first year to retain ₹50 Lakhs at the end of 20 years while increasing your SWP by 5% annually.
Closing Note
Systematic Withdrawal Plan (SWP) offers the best of both worlds — regular income and capital growth — while giving you flexibility and control.
When combined with stable debt funds, it can help you take a confident step toward your retirement.
Through Mutual Funds, Retirement Sahi Hai.
Disclaimer
The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to ensure that the facts are accurate and reasonable as on date. The information placed in this presentation is for informational purposes only and does not constitute an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available in this presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, Edubillions Tech Private Limited, is registered with AMFI as a mutual fund distributor bearing the registration number ARN258733. Investment in securities markets is subject to market risks. Read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
