How to plan your retirement with a SWP

In India, healthy life expectancy at birth improved by 4.02 years from 54.1 years in 2000 to 58.1 years in 2021, according to statistics from the World Health Organisation (WHO). As average lifespans grow longer, securing a financially sound future for yourself in the golden years is of utmost importance so you can retire worry-free. The money you have saved up should support a lifestyle similar to what you led in your working years, with some buffer for medical exigencies.

A well-structured retirement plan with the right investment strategies can ensure you achieve this and have a comfortable life post-retirement. In the latest episode of Mint Money Shots, presented by Invesco Mutual Fund, Assistant Editor at Mint, Aprajita Sharma, spoke about how a Systematic Withdrawal Plan or SWP can be a powerful tool to plan your retirement. A SWP allows you to manage your retirement corpus smartly as you get a steady income and minimise your tax burden. Watch the full episode below,

As the name suggests, a SWP allows you to withdraw a fixed amount from your mutual fund investments at regular intervals – you can select this interval to be monthly, quarterly or annually. By doing so, a SWP acts as a flexible way to convert your investments into a steady income stream during your golden years, a stage in life when you probably need it the most.

Get a regular income stream and save on taxes

“A SWP offers retirees the dual benefit of regular income and tax efficiency. Whether you are withdrawing for living expenses or any other needs, SWP can provide a steady cash flow while ensuring your retirement savings last longer,” said Sharma.

This dual benefit makes it a boon for retirees who can adjust the withdrawal amounts to meet their financial needs and also keep a portion of their corpus growing. According to financial experts, SWPs help retirees withdraw money in a structured way, offering a reliable income stream without depleting the portfolio too quickly. “One of the key benefits of SWP is tax efficiency. When you withdraw the amount, the money taken out is split into two parts: capital and gains only. The gains portion is taxed, while the original investment remains tax-free. This makes SWP much more tax efficient,” she explained.

Flexibility in the withdrawal amount

How much money will you need monthly to meet your day-to-day expenses after retirement? As inflation rises, your expenses will also increase over time. SWPs offer the flexibility of adjusting the withdrawal amount periodically to account for this to make sure you have enough money to keep you comfortable even with rising costs.

“To manage market risks and ensure that your money lasts through retirement, financial advisors often recommend the bucketing strategy. This strategy divides your retirement corpus into different types of funds based on their risk levels,” Sharma said.

To elucidate further, she shared a case study where a man allocated his Rs. 2 crore retirement corpus into three different buckets – ₹60 lakh in debt or hybrid funds, which is 30% of the corpus, another ₹60 lakh in equity-oriented funds, which is again 30% of the corpus, and the remaining ₹80 lakh in fully equity funds, which is 40% of the retirement corpus.

“Start withdrawing from the less risky bucket first, then move to equity-oriented funds as they have time to grow. This protects your immediate withdrawals from market volatility while allowing your equity investments to compound over time. It is advisable to start planning your SWP strategy two to three years before retirement. Doing so lets you structure your investments to optimise taxes and ensure that your retirement corpus is well-prepared to generate inflation-adjusted income. Proper planning ensures that your withdrawals are sustainable for your entire retirement,” she added.

Getting the most out of your SWP

A one-size-fits-all approach for withdrawal, like the popular 4 percent rule, is not a wise choice in the Indian scenario where investments are affected by different market conditions and inflation rates.

“It is essential to customise your SWP based on your lifestyle, inflation, and expected returns, according to investment experts, rather than following blanket rules. A personalised SWP with professional guidance can help ensure your corpus lasts while maintaining your quality of life,” she said.

It is equally important to select the right type of funds to maximise the gains from your SWP investment. You can choose balanced or equity savings funds that offer a mix of growth and stability. You might also consider multi-asset funds that diversify across equity, debt, and commodities if you want to reduce risks further.