Live your second innings in style!

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For most of us, retirement is a shifting goal post.  When we are young, we want to retire early and travel the world, but as we grow older, we realize we are not financially prepared to retire and hence keep pushing the date ahead! Increasingly, the challenge is not just about earning during the working years, but catering to the long periods of non-working life that lie ahead. With life expectancy rising thanks to better healthcare, it means the non-working years could extend up to 30 years or more!

This is why we need to talk more about this ticking time bomb, especially since most of us do not even have a guaranteed pension and the onus is on us to invest correctly for our sunset years. Irrespective of your profession, there will come a time we will retire either by choice or by force.  And to compromise on our lifestyle that we have got used to over the years, is hardly an option.

Higher expenses You will also need to factor in higher costs on healthcare, care givers, children’s education, marriage, lifestyle needs of an elderly person, and increase in the cost of living due to inflation.

The changing societal dynamics mean, you can no longer believe you can be dependant financially on your children. In fact, in most cases, they may not even be in the same city or country as you. So you have to factor this in as well when you plan for retirement years.

Accumulation, drawdown Planning for retirement has two key phases. Accumulation and drawdown. The accumulation phase can be done through SIP, which has become a buzzword, to the extent many investors feel it is different from mutual funds! In the accumulation phase, it is recommended to have a higher portion of your investments in equity to take advantage of the power of compounding. Small amounts invested regularly through SIP has potential to create a corpus for you by the time you retire.

But the key challenge is how to drawdown on your investments to take care of your monthly needs post retirement. Much less is known about an equally powerful tool that can help you live through your retirement years through a monthly payout.

SWP benefits The key benefit of Systematic Withdrawal Plan or SWP is akin to SIP i.e. discipline.  Just like in the case of SIP, we invest in a disciplined manner, in SWP we withdraw in a disciplined manner. The big mistake most people make is to spend the corpus one has accumulated when we retire and are then left struggling for a regular income to take care of our living expenses.

SWP or Systematic Withdrawal Plan is the one of the way to draw down from your investments when you need the money. This could be on retirement or when you take that sabbatical! You may no longer be working, but the bills do not stop coming.  So you need a monthly inflow of money to pay those bills and spend on whatever you need to spend on. SWP is convenient. You simply, give a one time instruction to your mutual fund to debit a certain fixed amount on a fixed date of the month, and the money is transferred to your bank account. It is also  considered as tax efficient when you withdraw money, a part of your original capital and a part of your gains are returned to you. There is no tax payable on the capital being returned to you and on your gains, you could pay as low as 10% tax if you are withdrawing from an equity or a hybrid fund. As per current tax laws, gains from a mutual fund that holds at least 65% or more equity, if held for 1 year, is taxed at 10%.

The mix of the amount of capital returned and gains made, can be decided by your advisor and even mutual funds themselves guide you on the right mix.  The important thing to keep in mind is, as you get closer to your retirement, you need to move to a hybrid funds kind of product that not only has equity but debt components and are also less volatile as compared to equity fund, since the bills do not stop!

The balance accumulated money stays invested and keeps earning you returns, thereby allowing you to continue your compounding journey. You can of course withdraw in a lump sum as well for any particular goal you may have, provided your monthly requirements are factored in.

For instance, if you have accumulated a corpus of Rs 1 crore and your average monthly expenses is Rs 1lakh per month, you intend to do an SWP for 20 years.

As per the historic data, Rs 1 crore invested in Nifty 50 in the 1st March 2003 with a monthly withdrawal of Rs. 1 lakh per month has given a return of approx. 18% XIRR (Source: NSE indices, internal research).

So, in the above example, you withdrew approx. Rs 2.4 crores at a rate of Rs 1 lac per month for 20 years and still have a corpus remaining of Rs. 10.75 crore (as of 31st March, 2023)! Note: The above is to illustrate power of compounding. This should not be construed as indicative yield/ returns of mutual funds. The returns shall change from time to time and are based on various factors including market movement, date of investment, period of investment, etc. Past performance may or may not be sustained in future.

You could leave this for your loved one’s or for any cause that may be dear to you. Either way, you will be financially free in your retirement years. Mutual funds offer this facility. So, if you want a monthly payout from your accumulated investments, SWP can be one of the way to go! (The author is Head – Retail & International Business, Baroda BNP Paribas Mutual Fund)

(Disclaimer: Stocks recommendations by experts or brokerages are their own and not those of the website or its management. Money9.com advises readers to check with certified experts before taking any investment decisions.)