Retirement Planning: Live the second innings of life in your own style! There will be no shortage of money – retirement planning spend your second innings of life in your own style
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It is necessary even after retirement
First of all you have to take into account the rising cost of living due to inflation along with higher expenditure on healthcare, caregivers, children’s education, marriage of children and lifestyle needs of an elderly person . Changing social dynamics mean, you can no longer count on being financially dependent on your children. In most of the cases, it may also happen that the children may be away from your city or even abroad for their job. So when you do retirement planning, you have to keep this in mind as well.
The two main stages of planning
There are two major phases of retirement planning. Continuous growth in the fund and reduction in the size of the fund. Fund raising phase can be done through SIP, which is a popular option. It is advisable to keep a major portion of your investments in equities in this phase to take advantage of the power of compounding. A small amount invested regularly through SIP has the potential to build a huge corpus for you by the time you retire. But the main challenge is how to reduce your investment to meet your monthly expenses after retirement. Little is known about an equally powerful option that can help you during your retirement through monthly payouts. This is Systematic Withdrawal Plan ie SWP.
What is SWP
SWP is also similar to SIP. Just like in case of SIP we invest in a disciplined manner, similarly in SWP we make withdrawals in a disciplined manner. The big mistake most people make is that when we retire, we spend the accumulated amount and then struggle for regular income to meet the expenses on our needs. SWP or Systematic Withdrawal Plan is a way to withdraw money from your investments as and when you need money. This option is a better option for retirement or when you are taking a break from the job for some time. Even when you are not working, bills keep coming for various expenses, which you have to pay. So you need monthly income or monthly inflow to pay those bills and spend on whatever you need. SWP is a convenient option for this. You just have to give a one-time instruction to your mutual fund to debit a specified amount on a specified date of the month, and the money will be transferred to your bank account.
Income tax benefits too
It is also considered tax efficient when you withdraw money from SWP, a part of your principal and a part of your profit is returned to you. There is no tax on the capital being returned to you. And if you are withdrawing from an equity or hybrid fund, you can pay 10% tax on the gains made. As per the current tax rules, a mutual fund holding at least 65 per cent or more equity is taxed at 10 per cent on gains if held for one year. Whereas on bank FD you will have to pay tax according to your slab. On this income, it sits close to 34 per cent.
Compounding also benefits
Funds remaining after the withdrawal remain invested and you continue to get returns on the same, so that you continue to get the benefit of compounding. You can withdraw funds in lump sum for any specific goal of yours, subject to taking into account your monthly requirements. For example, if you have accumulated a corpus of Rs 1 crore and your average monthly expenses are Rs 1 lakh, you want to do an SWP for 20 years. As per the historical data, a person invested Rs.1 crore in Nifty 50 on March 1, 2003 with a monthly withdrawal option of Rs.1 lakh. On this he got around 18% XIRR return every year (Source: NSE Indices, Internal Research). In this example the person withdrew around Rs 2.4 crore with withdrawals of Rs 1 lakh per month for 20 years. But there is still a corpus of Rs 10.75 crore (as on March 31, 2023) left.
what will happen to the remaining corpus
You can leave this leftover corpus to your loved ones or for any cause that is dear to you. You can also mention in it who will get the corpus in your absence. Either way, you will be financially independent in your post-retirement years. Mutual funds provide this facility. So, if you are looking for monthly payouts from your investments, then SWP can be a better option.
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