I see huge hoardings with a life size picture of a retired couple on a water scooter smiling ear to ear. The hoarding is trying to convey how you can live life fully without making any compromises even post retirement.
Post retirement is a different period specially in financial terms. The regular salary stops. Either you get a pension, if you are lucky, or you rely on your own investments to generate an income to meet your expenses.
To plan your income post retirement using the SWP, which is mentioned in big bold words on the hoarding.
Hello, what is an SWP?
SWP stands for a Systematic Withdrawal Plan.
When you do an SWP, you arrange to withdraw money from your investments on a regular basis, say monthly, quarterly, half yearly or yearly. This helps you create a regular cash flow that you can use to meet predefined expenses.
SWP is more popularly associated with mutual funds.
In the context of mutual funds, you may think of SWP as a reverse of an SIP. In SIP or Systematic Investment Plan, you invest money on a regular basis, while in SWP you withdraw money on a regular basis.
So, in what scenarios is an SWP useful?
3 scenarios come to mind:
One is the education of your child.
So, you have saved all this money for your chid’s education. The child has now got admission into college.
You have a broad idea of how much money will be required on a monthly or quarterly basis for living expenses. The half yearly fees is known too.
To ensure that you meet the expenses without a hitch, you simply sign up an SWP.
First you invest your money lump sum into an fund of your choice (typically a debt fund). Then you instruct the fund to do a monthly SWP for a fixed amount of say Rs. 10,000. Through this, a monthly credit is made to the child’s account.
You do another half yearly STP which will provide for the college fees.
Of course, you can receive the amount in your account too and then send it forward.
Meanwhile, the investment in the debt fund continues to earn a return too.
The second and more popular use is for post retirement income.
Not all people are lucky to get a pension. Once you retire, you need to assess all your investments, gratuity, PF and other separation benefits and arrange them in an optimal portfolio to create your personal income plan.
Now, if you are a person of limited means, Bank FDs, Senior Citizen Savings scheme, or an annuity are enough to meet your requirements.
But for most there is need to go beyond FDs to generate enough income. In line with a post retirement income plan, mutual funds emerge as a vehicle of choice.
Using SWP, you can ensure that a regular sum gets credited to your bank account and supports your other fixed income.
Finally, there is the ignored aspect of taking care of family members with special needs.
You may have a family member (a child, a sister, a parent), who needs special care because of various reasons.
You can invest certain portion of your money in mutual funds and create an SWP to ensure that an amount is always available to take care of the needs of this special member.
The SWP can be mentioned in your WILL too to ensure that the support to the special needs member continues.
Key things to remember when doing SWP in a mutual fund
#1 The exit loads can make it painful
An exit load is levied on the total amount withdrawal and can kill a subsMost mutual funds specially of the equity variety have exit loads of upto 2% if you redeem in less than 1 year of purchase. In some cases, this exit load is applicable for upto 2 years.
In case of debt funds, exit loads of upto 1% are applicable if you withdraw within 6 months of purchase. However, the liquid and ultra short term funds do not have an exit load.
Some funds also allow upto 20% withdrawal in a year without any exit loads.
#2 Understand capital gains tax implication
In case of equity funds, if you withdraw your money before 1 year, you pay short term capital gains @15%. Post 1 year, there is long term capital gains
but the tax on long term gains is zero, if you have paid an STT. @10%.
In case of debt funds, any gains on withdrawals in less than 3 years are taxed at your personal tax bracket. [Update: From April 1, 2023, if you make new debt fund investments, then all gains are subject to short term capital gains tax. No indexation benefit is available on these new investments. Investments made upto March 31, 2023 still get the earlier benefits.]
Over 3 years, you get indexation benefit on your cost of purchase and thus the indexed gains are taxed at 20%.
#3 SWP in equity funds can make your income short lived
If you use only equity funds to create an SWP for your monthly income, you may run into trouble. Equity markets are volatile and the value of your investments fluctuates as markets move up and down.
There may be periods when you withdraw more money in a downmarket thus eroding your capital. This reduces the life of the income you receive via SWP.
#4 Not all funds allow SWP
Please check carefully before signing up. The fund you choose to invest lump sum money in must allow an SWP too.
Also, if you have an existing SIP in a fund, an SWP from the same fund folio may not be allowed.
#5 Systematic Withdrawal Plan is only a tool
Finally, remember that SWP is only a method, a tool and not a product by itself. Use it to manage your cash flows and provide for your goals.
Do you think an SWP will be useful to you?
Have a further question? Do send it t0 us.