Introduction
Money management has been a concerned topic for everyone. Making investment now is not enough to meet our financial goals. We need and are regularly searching strategies to optimize our investments for our financial planning. One of such strategies that has been buzzing among the investors is ‘Systematic Withdrawal Plan(SWP)’. More than anyone, this strategy can be a prominent factor of financial planning for middle class families. In this article, we will discuss SWP from the perspective of middle-class investors. Systematic Withdrawal Plan can be a game-changer for individual investors looking for a steady income stream.
What is a Systematic Withdrawal Plan (SWP) ?
Systematic Withdrawal Plan (SWP) is a contemporary investment strategy which allows investors to withdraw a fixed or variable amount of money at a regular intervals from their previous investments. Systematic Withdrawal Plan (SWP) works in the opposite direction to Systematic Investment Plan (SIP). In SIP we regularly invest a fixed amount into a mutual fund whereas in SWP, we have a regular payout from the investments.
Key Features of Systematic Withdrawal Plan
Regular Income : SWP allows investors to withdraw a steady income from their investment. This is beneficial for retirees or anyone looking for an additional income source.
Capital Appreciation : The investment remaining after the regular withdrawal continues to grow in the market. SWP allows regular income and benefits of capital appreciation in the investment, which is a win-win financial planning.
Flexibility : SWP lets investors choose their withdrawal conditions like frequency and amount. Investors can plan for their monthly, quarterly or yearly withdrawal. Similarly, they can decide what withdrawal would best suit them. Also, investors can adjust these terms based on their changing financial needs.
Tax Benefits : In a SWP, only the gains on the investment are taxed. This makes SWP more tax-efficient than other forms of regular income. SWP are treated as redemptions and hence only gains are taxed reducing the overall tax liability.
How can SWP Benefit a Middle Class Family ?
A middle class family has a financial standing at a moderate level of income where they are able to meet their basic needs, afford some discretionary spending and save for the future. SWP efficiently helps middle class families in managing financing and securing a stable income. Here is the illustration of how SWP can benefit a middle class family.
Mr. Sharma owns a small business and he is from a decent middle class family. He is in his 50s and he has patiently saved and invested in mutual funds over the years. He is planning to retire from the business and so far he has saved Rs. 50,00,000. After retirement, he is planning to have a steady income stream to cover household expenses and other emergency expenses. Therefore, he decides to use a Systematic Withdrawal Plan (SWP) to have such steady income.
SWP Strategy Scenario
* Investment Amount : Rs. 50,00,000
* Expected Annual Return : 10 %
* Monthly Withdrawal : Rs. 40,000
Benefits for Sharma Family
- SWP provided a steady cash flow to the family, assisting them in budgeting and managing their expenses.
- The remaining portion of their investment was reinvested providing them extra return on their investment.
- As tax was imposed on the gain, Mr. Sharma lowered their tax expenses. Tax saved is money earned.
- Lastly, SWP provided financial stability to the family, leading to their peace of mind.
How can we start a SWP ?
A Systematic Withdrawal Plan (SWP) is a powerful strategy for middle-class investors. Every penny saved is investment for the individual at the class. Hence, SWP is an effective financial strategy offering flexibility, regularity, tax-efficiency and financial stability to the individual.
Starting a SWP is a simple and straightforward procedure. We can start a SWP by:
Choosing the right Mutual Fund
The first and foremost thing for SWP is to engage in the right mutual fund scheme. There are multiple mutual funds schemes, therefore, selecting the right mutual fund which matches an individual’s risk tolerance and investment goals is important. Amount used during the SWP is from the funds collected from mutual funds investment, therefore, selecting a stable and consistent fund is necessary.
Deciding on Withdrawal Amount and Frequency
Considering the terms of investment and expectation for financial needs, one determines how much to withdraw and how often.
Consulting with a Financial Expert
One should consult with some expert or advisor for proper guidance and implication of SWP. Financial advisor will assist one in selecting the right mutual fund and will access the optimal SWP plan which can help individuals fulfill their future obligations and expenses.
Setting up the SWP
After all considerations and consultations, set up a SWP for future steady income and other SWP benefits.