Know How SWP Works & How It Benefits Retired Employees

Last Updated on August 10, 2024 by Ali Hamza

We all wish for a financially stable and secure present and future for ourselves and our loved ones. Don’t we? For this, we extend our efforts to our jobs or businesses to generate a consistent income while also investing in individual investment avenues. But what if the regular income stops once you retire? You cannot solely rely on the interest rate of bank fixed deposits and small-saving schemes as they aren’t sufficient, nor on your retirement corpus, as it will deplete over time. You require something more to be free from financial worries. So you can lead a peaceful retired life. Here an SWP (Systematic Withdrawal Plan) meticulously planned with the help of a financial advisor or SWP calculator can help you with that.

By investing in a lump sum amount in mutual funds and withdrawing a fixed or variable amount from your mutual fund investments, anyone can set up a consistent flow of income their way with SWP. Having such liquidity while you generate capital gains from your lump sum investments, you can meet your desired goals and lead a peaceful retirement life ahead.

How does an SWP plan work?

SWP is similar to fixed deposits. In fixed deposits, you withdraw interest amounts while your investment corpus remains intact. But, with SWP, your investment value decreases as you withdraw. In SWP, you can also withdraw the capital appreciation part and keep your investments as it is.

The payouts from the SWP plan work rupee cost-averaging. Whenever the withdrawal period of investors nears, SWP automatically redeems some mutual funds units to pay investors their pre-decided withdrawal amount. SWP works with market conditions. If the market isn’t doing well, few fund units will get redeemed, and vice versa. This kind of work does two things: first, it averages out the returns, and secondly prevents investors from making impulsive decisions regarding their investments when the market isn’t performing well. Such financial planning allows investors to generate cash flow and meet their goals with the capital gain they would receive from their investments.

Suppose you have a corpus of Rs 10 lakh and invest in mutual funds with SWP. The current NAV of the scheme is Rs 200, so you will get 5000 units. So if you withdraw Rs 20,000 every month, your holding will get reduced by a specific number. Over six months, after withdrawing Rs 1,20,000, the total value of your portfolio will be Rs 4,15,661. It shows that SWPs are better than lump sum amounts, as the remaining investment units tend to grow and appreciate with time.

How does the SWP plan benefit retired employees?

The retirement period is something we all wish to be free from financial worries. Leading a peaceful life while your day-to-day expenses are being taken care of is what one expects after all the years of hard work. But, to make this dream come true, it’s essential to make vital investment decisions today. For this, you not only have to make wise investment choices but ensure that you are well covered for your retirement as well as in case of emergencies. Investment instruments such as mutual funds here prove to be the most powerful tools for such financial & investment planning. Under mutual funds schemes, various plans facilitate investors with specific usefulness. Out of these plans, a combination of a Systematic Investment Plan (SIP) and a Systematic Withdrawal Plan (SWP) can help you address your post-retirement needs and build a sizable corpus.

Here are some reasons SWP proves to be beneficial for retirees.

• In this wake of rising living costs, SWP Calculator is a sigh of relief for retirees enabling them to create a regular flow of incomes to tackle day-to-day expenses. If you are nearing your retirement, you can invest in the best ULIP (Unit Linked Insurance Plan), select any SWP features to withdraw fixed or variable amounts in the future and save yourself from the cash crunch.

• An SWP is like a pension plan for retirees. By investing in mutual funds through SIPs over the years regularly and building a large corpus, you can enable an SWP plan and withdraw a fixed or variable amount from your investment while remaining invested (you can invest in ULIP 5-10 years before your retirement). Doing so will help you earn a reliable pension income post-retirement, ensure a comfortable retirement, and be financially independent. With an SWP calculator, you can customize your cash flow according to your needs.

• Most investors nearing retirement tend to be more risk-averse and focus on capital preservation than high returns. With SWP, investors can surpass the volatile market situations by transferring their funds to savings accounts when the market isn’t performing well and reinvesting when it catches the pace.

• Retirees can use SWP Calculator and get exceptional tax benefits on long-term gains of up to 1 lakh. On capital gains of above 1 lakh, 15% is applicable in the case of equity funds. For debt funds, if you redeem the units before three years, taxes are levied on your income tax slab. After three years, a 20% tax is applied. These taxations are moderate because of indexation benefits.

• Investors can customize their SWP amount with SWP Calculator, withdrawal frequency (at which they want the cash flow such as monthly, quarterly, annually etc).  Moreover, an investor can choose to stop SWP whenever they want, and add more investment in the scheme according to their needs. In short, they have complete authority to manage their investments.

Conclusion:

To address your cash flow needs post-retirement, there is nothing better than a SWP Calculator. With a sizable investment corpus in hand, you can withdraw a fixed amount at predefined intervals for your expenses with SWP. However, you have to be careful in regards to the withdrawal amount as a higher amount can cause a loss of investment value and thus interest. It may also deplete investment completely. To avoid such situations, use an SWP calculator to identify the exact value, as in how many withdrawals you need to select so you can get the best of the cash flow and the remaining fund units generate sufficient growth to your investment value.

Apart from that, if you are interested to know about Corporate Fixed Deposits then visit our Business category.