How to Use SWP for Withdrawing Funds From an Accumulated Corpus

How to Use SWP for Withdrawing Funds From an Accumulated Corpus

There are instances when you need a specified amount every month for a specified purpose. For example, you may need a specified amount every month to pay the child's education fees, loan EMIs, regular expenses during retirement, etc.

In such a scenario, you can set up an investment that gives you the specified amount every month. These are known as systematic withdrawal plans (SWPs). In this article, we will understand what a systematic withdrawl plan systematic withdrawl plan is and how it can be used for withdrawing funds from an accumulated corpus.

What Is SWP in Mutual Fund

A systematic withdrawal plan (SWP) is a mode of withdrawal. In mutual funds, an SWP allows you to withdraw a specified amount at a specified frequency from a specified mutual fund scheme for a specified period. The withdrawal frequency can be monthly, quarterly, yearly, etc. You can specify a date on which the units will be redeemed every month.

How To Invest In SWP? 

For example, Ajay has accumulated Rs. 1.14 crores as his retirement corpus. He invests this money in a debt mutual fund scheme. Using an SWP, Ajay withdraws Rs. 50,000 every month (on the 1st of every month) from the debt fund scheme for a tenure of 20 years.

The SWP mode of withdrawal is useful when an individual needs a specified amount every month for a specified tenure. Some examples can include

  1.  Kara needs Rs. 7,000 every month for his daughter’s education
  2. Priyanka needs Rs. 15,000 every month to pay her home loan EMI
  3. Ajay needs Rs. 50,000 every month for his regular monthly expenses during his retirement years 

An SWP or similar structure can be set up using various financial products. For example,

  1. Ajay has set up an SWP in mutual funds – 12,100 to redeem the units of a debt scheme for Rs. 50,000 every month to meet his monthly expenses during his retirement years
  2. Karan has set up a fixed deposit that pays a monthly interest of Rs. 7,000 per month
  3. Priyanka has invested a large amount in a corporate bond that pays a monthly interest of Rs. 15,000
  4. Kanchan has invested a large amount in a REIT that pays a quarterly dividend of Rs. 5,000
  5. Richa has invested a large amount in the shares of a company that pays a half-yearly dividend of Rs. 3,000

The above are all examples of SWPs. However, in the above scenarios, the withdrawal amount from a debt fund, monthly interest from a fixed deposit, and monthly interest from the corporate bond are fixed. However, the quarterly dividend from a REIT and half-yearly dividend from company shares are not fixed. The dividend amount can increase or decrease. In a particular year, if the financial performance is bad, the dividend may be skipped altogether.

Apart from the above, some other investments can give regular returns/cashflows like an SWP. For example, the Senior Citizens Savings Scheme (SCSS) pays quarterly interest, a commercial/residential property can give monthly rent, an annuity product pays annuity at a specified frequency, etc. SWP is mainly used for making regular withdrawals from debt mutual fund schemes.

Applying SWP for Retirement Fund 

A systematic investment plan or SIP is a popular mode of investing in mutual funds. A systematic withdrawal plan or SWP is exactly the opposite of a SIP. A SWP helps an investor withdraw money from a mutual fund scheme in a systematic and planned manner.

SIP and SWP Are Opposite of Each Other 

A SWP helps create a steady income stream and is ideal for retirement planning. Most people invest their retirement corpus in a debt fund and start a SWP to make monthly withdrawals for their regular expenses. Let us understand how this can be done with an example. Ajay has accumulated a retirement corpus of Rs. 1.14 crores (Rs. 1,14,79,569).

He invests the money in a debt fund that is expected to give a return of 6.5% p.a. Ajay has set up a SWP to withdraw Rs. 50,000 every month for his regular expenses from the 1st year of retirement (61st year of age). Ajay's annual expenses are expected to increase by 6% p.a. (inflation). Accordingly, the monthly withdrawal amount will also increase by 6% annually. Ajay's life expectancy is assumed to be 80 years.

The below table shows how the SWP will work in this case.

Table: Applying SWP to a Retirement Corpus

Age Current Annual Expenses Inflation Corpus at the Start of year Corpus After Withdrawal Return Corpus at the End of Year
61 600,000 6% 1,14,79,569 10,879,569 6.50% 11,586,741
62 636,000 6% 1,15,8,6741 10,950,741 6.50% 11,662,539
63 674,160 6% 1,16,6,2539 10,988,379 6.50% 11,702,623
64 714,610 6% 11,70,2,623 10,988,014 6.50% 11,702,235
65 757,486 6% 11,70,2235 10,944,749 6.50% 11,656,157
66 802,935 6% 11,65,6157 10,853,222 6.50% 11,558,681
67 851,111 6% 11,55,8681 10,707,570 6.50% 11,403,562
68 902,178 6% 11,40,3562 10,501,384 6.50% 11,183,974
69 956,309 6% 11,18,3974 10,227,665 6.50% 10,892,463
70 1,013,687 6% 10,89,2463 9,878,776 6.50% 10,520,896
71 1,074,509 6% 10,52,0896 9,446,388 6.50% 10,060,403
72 1,138,979 6% 10,06,0403 8,921,424 6.50% 9,501,316
73 1,207,318 6% 95,01,316 8,293,998 6.50% 8,833,108
74 1,279,757 6% 88,33,108 7,553,351 6.50% 8,044,319
75 1,356,542 6% 80,44,319 6,687,777 6.50% 7,122,482
76 1,437,935 6% 71,22,482 5,684,547 6.50% 6,054,043
77 1,524,211 6% 60,54,043 4,529,832 6.50% 4,824,271
78 1,615,664 6% 48,24,271 3,208,607 6.50% 3,417,167
79 1,712,603 6% 3,41,7167 1,704,563 6.50% 1,815,360
80 1,815,360 6% 1,81,5360 0 6.50% 0


Note: For ease of calculation and display, we have shown the annual withdrawal amount instead of the monthly withdrawal amount. The SWP amount will have to be increased by 6% annually to meet the annual increase in monthly expenses (6% inflation p.a.).

Chart: Utilisation of Retirement Corpus With SWP

Utilisation of Retirement Corpus With SWP

The above image shows how the retirement corpus will decrease, and annual expenses will increase over time. The Blue colour bars represent the annual amount withdrawn through SWP. In the last year, both will match, and the retirement corpus will be exhausted.

Taxation of SWP Withdrawals

In a debt fund, the capital gains, irrespective of the holding period, are added to an individual’s overall income and taxed at the slab rate. There is no tax deducted at source (TDS) for SWP withdrawals.

Making Your Own SWP Plan

You will come across SWP calculators on many AMC websites and financial intermediary websites. You will have to input the investment amount, expected rate of return, monthly withdrawal amount, withdrawal tenure, etc. It will calculate the total withdrawal amount, the return you will earn, the amount you will be left with, etc.

For example, you can access the SWP calculator on the ICICI Bank website at the following link: ICICI SWP Calculator

You can also discuss with an investment expert to get a customised SWP plan made for yourself.

SWP: Get the Required Cash Inflows to Meet the Needed Cash Outflows

We come across various expense items for which a specified amount is required every month. The SWP mode is an excellent way to plan for these expenses. Apart from mutual fund schemes, you can also apply the SWP mode to other financial products. A SWP helps you get the required cash inflows to meet the needed cash outflows. Thus, it gives you the much-needed peace of mind.

What Is SWP In Mutual Fund SWP For Retirement

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