How Retirees Can Use the SWP Option to Manage their Cashflow Needs
December 18, 2021 Mutual Fund
Recently, I attended my Uncle Rajesh’s retirement farewell party. While we all had our family dinner, we were discussing my uncle’s post-retirement plans. He said, “I wish to travel abroad, however, the recent emergence of the ‘Omicron’ a new variant (of the coronavirus) has raised concerns.”
To which his brother replied, “Rajesh, instead of spending on a vacation, don’t you think holding some funds as a reserve for an emergency in these uncertain times will be a prudent choice?. You see, liquidity is the paramount need of any retiree to meet expenses post-retirement.”
Uncle Rajesh expressed, “Yes, I do agree that liquidity for a retiree is essential …and I have made some savings and investment in various avenues for regular income post-retirement. It includes investments in Bank fixed deposits with a quarterly interest Pay-out plan, Pradhan Mantri Vaya Vandana Yojana, plus I receive dividends from my mutual funds”
I suggested to uncle Rajesh, “Why don’t you move out of the dividend option, and instead choose growth and address the cash-flow aspect by selecting the Systematic Withdrawal Plan (SWP) instead? Doing this can create systematic cash-flow and not have to depend on dividend income – which is no way guaranteed, plus taxable.”
He was intrigued by the thought. “That sounds interesting, Mitali but I am unaware about the SWP option. Can you explain in detail how it works?”
I replied to him, “As you look around amid these uncertain times, liquidity is most important factor to survive any financial difficulties in an unforeseen event. Mutual funds can help achieve this purpose with Systematic Withdrawal Plan and assist you gain optimal risk-adjusted returns as well.” I went on to explain him in great detail…
What is SWP?
A systematic Withdrawal Plan or SWP allows you, the investor to withdraw systematically on predefined dates from your mutual fund investments. It could be made on an annual, semi-annual, quarterly, or even monthly basis. The withdrawals could be a fixed or a variable amount.
This way, you are in better control of your investment for your liquidity needs and do not have to depend on dividends that aren’t guaranteed. The remaining investment in your mutual fund scheme would generate returns for you. Thus, what SWP does is facilitate piecemeal withdrawals. On each withdrawal, the value of your investment in the fund is reduced by the market value of the units that you have withdrawn, and the remaining mutual fund units clock returns for you.
How does the SWP option work?
For example, if you have already invested in a mutual fund scheme and you have 10,000 units in your mutual fund scheme, and you wish to withdraw Rs 10,000 every month through an SWP.
Consider the net asset value (NAV) of the scheme is Rs 50. The withdrawal of Rs 10,000 from this scheme will mean that 200 units are being redeemed, which is Rs 10,000/NAV of Rs 50. The remaining balance units in your mutual fund post this withdrawal will be 9,800 units (10,000-200).
At the beginning of the next month, if the NAV of your scheme increases to Rs 54, then the withdrawal of Rs 10,000 in next month would mean redeeming 185 units and not 200 units as in the last month. Your mutual fund balance would be left with 9,615 units post this month withdrawal (9,800-185). Thus, with each withdrawal, your mutual fund will see a decline in its units.
You see, as an essential aspect of benefiting from this SWP option and making the most of it is planning the SWP, keep in mind your post-retirement needs. It can have a detrimental effect on your investment if you make unplanned lump sum withdrawals. Doing so may not be able to adequately fulfil your post-retirement expenses. Hence strictly stay with the SWP path you choose for your liquidity needs.
Here are seven key benefits of the SWP option:
- If planned well, allows you to customise the flow of income at predefined intervals and amounts.
- You have the liquidity (access to your money invested in the mutual fund scheme) with guaranteed income.
- It makes sure that you do not end up withdrawing large amounts in a panic or fear during market corrections.
- Inculcates a disciplined approach to utilising the corpus built for your retirement, as you can plan your withdrawals as per your needs.
- It helps preserve wealth for future expenses.
- Facilitates rupee-cost averaging.
- Counters inflation with the balancing units, earning you decent returns.
Another reason why SWP is a wise investment strategy for retirees is these withdrawals, which are effectively redemptions, are not subject to tax deductions at source (TDS). The capital gains, though, are taxed on the withdrawn amount.
Do keep in mind that the withdrawals are subject to tax, depending on if it is an equity-oriented or debt-oriented mutual fund scheme. It would be subject to Short-Term or Long-Term Capital Gain Tax, as the case may be, depending on the holding period for the scheme.
To Conclude…
A systematic Withdrawal Plan (SWP) can be utilized by those who are planning for their retirement in the coming years or have retired. Usually, the large amount of money that one receives at the time of retirement in the form of gratuity or pension fund is invested in traditional savings instruments such as Bank FD and other government schemes offered for retired individuals to create a regular source of income. But consider a worthy and suitable mutual fund scheme as well to clock efficient inflation-adjusted returns, and choose the SWP option to address the liquidity for your retirement expenses.
Given that, lack of financial knowledge also leads to making unworthy investment decisions that could affect your wealth. Your retirement corpus is your hard-earned money and allocating it to worthy investment avenues with suitable asset allocation based on your risk tolerance and cash flow needs is equally important for many retirees.
Therefore, you must enhance your financial knowledge for a better understanding of some investment avenues that may help you generate decent returns on investments and create a regular income source post-retirement.
Happy Investing!
This article first appeared on PersonalFN here
