Mutual fund SIP + SWP: A simple 2-step investment strategy for stress-free retirement

Every individual envisions of a dream retirement complete with substantial savings and a steady monthly income. A well-structured retirement plan provides financial independence, protection from inflation and contingency expenses amid increasing life spans and rising healthcare and living costs.

Retirement can be planned through the adoption of structured investment approaches aligned to the individual’s income levels, risk tolerance, and time horizon. Individuals and working professionals generally consider traditional investment streams like EPF, NPS, insurance products, and voluntary contributions for their retirement planning. These investment products are good, but generally have a lower rate of return compared to equity investments.

Besides the above traditional investment products, one can consider a combination of Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) for retirement planning.

In the early stages of your career, the risk-taking capacity is usually high. Hence, one can go for a regular equity mutual fund SIP till retirement and redeem this lumpsum corpus on a monthly basis post retirement by investing in a conservative low-risk mutual fund.

What is a Systematic Withdrawal Plan (SWP)?

An SWP or Systematic Withdrawal Plan allows investors to withdraw a specific amount from their mutual fund accounts regularly. The money withdrawn provides a stream of income after retirement while continuing to earn interest. An SWP produces consistent income for the investor, and the balance of the accounts continues to compound.

In contrast, the Systematic Investment Plan (SIP) involves investing a fixed amount at regular intervals to build wealth gradually through compounding of interest and rupee cost averaging. Therefore, the SIP strategy is a focus on accumulating wealth for a long-term goal like retirement and education. For example, if a person contributes ₹10,000 per month into an equity mutual fund via SIP, assuming a 12% average annualised return from the equity fund, the potential growth of the investment at the end of 10 years could be around 23,23,390 lakh, which includes the total investment amount of ₹12,00,000 and return of 11,23,391 lakh (Power of Compounding).

Key features of SWP

• SWP offers a regular income with the option to choose the amount and frequency of withdrawals
• The remaining corpus keeps giving returns, which increases sustainability over the long run.
• It helps maintain discipline in managing withdrawals, ensuring retirement funds are not prematurely depleted.
• It helps in combating inflation much better than fixed-interest investments.

These two strategies of SIP and SWP have completely different purposes but can be used to manage your retirement effectively, with SIP being a strategy for the accumulation of wealth, while SWP produces income to support the retirement lifestyle.

4% SWP rule: A gamechanger

To make your retirement savings last for a long period of time, a 4% SWP rule can be used. The 4% SWP rule is a simple retirement withdrawal rule in which you should withdraw only 4% of your total investment in the first year, and then increase the withdrawal amount slightly every year to adjust for inflation.

The goal is to avoid withdrawing large amounts from retirement savings in the early years of post-retirement so that your savings can continue to grow and support you for 20 to 30 years or more. It is a good way to create an ongoing source of income from your retirement savings while ensuring that those same savings will be adequately preserved over the duration of your retirement.

For example, imagine you have ₹50 lakh in retirement savings. So, using 4% rule, you will only withdraw ₹2 lakh for the first year (4% of ₹50 lakh) or ₹16,667 per month. Every year, you increase the withdrawal amount slightly, considering the inflation rate of around 6%.

SIP investment for 20 years

Let's assume Rohan starts investing ₹15,000 every month through SIP at age 30 and continues for 20 years, assuming an average return of 12% over the 20 years. The total amount invested is ₹36,00,000, which grows to ₹1,49,87,219, roughly to around ₹1.5 crore.

Rohan plan to retire at the age of 50, and he opts for a Systematic Withdrawal Plan (SWP). He decides to withdraw ₹50,000 per month (in accordance with the 4% withdrawal rule). This withdrawal amount grows annually at 6% to keep pace with inflation, from his ₹1.5 crore corpus.

Assuming a conservative 8% return on his lumpsum corpus while doing SWP and an annual inflation rate of 6%. Still, the corpus withdrawal will last for more than 35 years.

Withdrawal plan

As evident from the above table, the combination of SIP and SWP has created a robust retirement savings that can last for more than 35 years inflation-adjusted. The above calculation shows consistent small investments, and the power of compounding could help an individual survive old age stress-free.

Conclusion

Compared to bank deposits and other fixed return investments, the SIP and SWP combination likely to offer a better return on investment over a longer period of time. However, one also has to consider tax implementations. Also, some investors may not be too comfortable with the equity exposure of a mutual fund, so in that case, returns could be different.

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