I was talking to my uncle over a cup of tea. He Has around ₹50 lakhs in his provident fund and some fixed deposits. He told me that every time he breaks a fixed deposit he feels like he is using up his capital. He does not want to do that. He just wants a monthly income from his investments without having to sell everything at once.
This is where a Systematic Withdrawal Plan comes in. It is a way to get an income from your investments. Many people spend years learning how to invest. They do not know how to use their investments to get an income when they retire. I want to explain how this works.
Introduction: Your Mutual Fund Can Pay You a Pension
Most people think that mutual funds are for investing. You put money in. Then take it out after a few years.. What if you want a regular income instead of a big lump sum? A Systematic Withdrawal Plan can do that. It is like a reverse of a Systematic Investment Plan. In a Systematic Investment Plan you put in a money every month. In a Systematic Withdrawal Plan you take out a money every month and the rest of your money stays invested and grows.
This can be very helpful for people who are retired or planning to retire. Of keeping all your money in a savings account where it earns very little interest a well-planned Systematic Withdrawal Plan can give you a steady income for years.. Is it safe? How does it work when the market goes up and down? I will explain this step by step.
What is a Systematic Withdrawal Plan?
A Systematic Withdrawal Plan is a facility offered by funds. You tell the fund house to take out a fixed amount of money from your investment every month, quarter or year. This money is then put into your bank account like a salary.
Let me give you an example. Suppose you invest ₹30,00,000 in a fund. You set up a Systematic Withdrawal Plan of ₹15,000. Every month the fund takes out money to give you ₹15,000. The rest of your money stays invested. If the fund grows at 8-10% per year your capital may not reduce much while you get your monthly income.
retired investors like Systematic Withdrawal Plans more than fixed deposits. This is because fixed deposits only give you interest on the amount and this interest is fully taxable. Systematic Withdrawal Plans can be tax-efficient.
Systematic Withdrawal Plan vs Other Retirement Options
Let me compare Systematic Withdrawal Plans with other options.
| Feature | Systematic Withdrawal Plan | Fixed Deposit | Senior Citizens Savings Scheme | Monthly Rent from Property |
|---|---|---|---|---|
| Monthly Income | Yes you can choose the amount | Yes but only interest | Yes but every quarter | Yes but it is not certain |
| Does Principal Grow | Maybe if returns are more than withdrawals | No principal is fixed | No principal is fixed | No property value may change |
| Tax Treatment | Capital gains tax with indexation benefit after 3 years | Interest is taxed as per your slab | Interest is taxed as per your slab | Rental income is taxed as per slab |
| Hassle Factor | Low it is automated | Low | Medium there is some paperwork | High there are tenants and repairs to manage |
| Liquidity | High you can stop or change anytime | Low breaking a fixed deposit has a penalty | Very low it is locked for 5 years | low you cannot sell a part of the property easily |
No single option is the best.. For someone who wants a monthly income without managing tenants or locking money for years a Systematic Withdrawal Plan is a good choice.
How Systematic Withdrawal Plan Works with Market Ups and Downs
Many people worry that if the market falls their Systematic Withdrawal Plan will stop.. That is not true.
Let me explain with an example. Suppose you invest ₹50,00,000 and start a Systematic Withdrawal Plan of ₹20,000. In one year you take out ₹2,40,000. If the fund grows at 10% that year it earns ₹5,00,000. So your corpus after one year might be around ₹52,60,000, which’s more than what you started with.
. What if the market falls by 8%? Your fund loses ₹4,00,000 in value. On top of that you take out ₹2,40,000. So your corpus drops to around ₹43,60,000. This can be painful.
But the key question is, do you need that income no matter what? If yes you can continue your Systematic Withdrawal Plan. The fund will take out units when prices are low. When the market recovers your corpus may bounce back.
In my experience people who stop their Systematic Withdrawal Plan during a market downturn often lose more. This is because they sell their units at a price. People who stay calm and continue their plan often see their corpus recover within 1-3 years.
Three Things to Check Before Starting a Systematic Withdrawal Plan
Here is a checklist to follow before you start a Systematic Withdrawal Plan.
1. Choose the Right Fund Type
- For Short-Term Income: Choose debt funds or hybrid funds with equity exposure. This means volatility and more predictable withdrawals.
- For Long-Term Income: A balanced advantage fund or conservative hybrid fund can work well. A small equity component helps your corpus grow and keep up with inflation.
2. Do Not Withdraw More Than Your Corpus Can Sustain
A common rule of thumb is to withdraw no than 4-6% of your initial corpus per year. For a ₹1 crore corpus that is ₹4-6 lakhs per year or around ₹35,000-50,000 per month. If you withdraw more you risk running out of money in 15-20 years.
3. Keep an Emergency Buffer
Some people who use Systematic Withdrawal Plans fail because they do not keep an emergency fund. If the market crashes for 18 months you do not want to be forced to sell your units at a price. Keep 1-2 years of expenses in a fund or savings account. Use this for your Systematic Withdrawal Plan during bad markets and let your main corpus recover.
A Real-World Example
Let me give you an example.
Mrs. Mehta is 62 years old and retired. She has ₹75,00,000. Needs ₹30,000 per month for her expenses. She chooses a hybrid fund and sets up a monthly Systematic Withdrawal Plan of ₹30,000.
- Year 1 – Market is Flat: She takes out ₹3,60,000. Her corpus drops to ₹71,40,000.
- Year 2 – Market Does Well: Her corpus grows to ₹78,54,000 before withdrawals. After taking out ₹3,60,000 her corpus is ₹74,94,000, which’s almost back to where she started.
- Year 5 – Over Five Years: Her corpus is around ₹73,00,000, which is still healthy after 5 years of monthly withdrawals.
- Year 10 – She Has Withdrawn ₹36,00,000:. Her remaining corpus is, around ₹65,00,000 meaning she lived off her returns without using up her capital.
By the way if you want to see Systematic Withdrawal Plan in action our free Systematic Withdrawal Plan calculator at dailymixdose.com lets you plug in your numbers. You can test withdrawal amounts, time periods and return assumptions for Systematic Withdrawal Plan.
A few honest cautions before you start using Systematic Withdrawal Plan
Let me be straight with you. Systematic Withdrawal Plan is not a machine. Systematic Withdrawal Plan has risks too. You should know about the risks of Systematic Withdrawal Plan before you start.
- Sequence of returns risk for Systematic Withdrawal Plan: If markets crash badly in your 2-3 years of retirement your money may take a permanent hit even if markets recover later. This is why keeping that emergency buffer is so important for Systematic Withdrawal Plan.
- Inflation eats your purchasing power with Systematic Withdrawal Plan: Taking the ₹30,000 per month for 20 years means you’ll be able to buy less and less with Systematic Withdrawal Plan. Consider increasing your Systematic Withdrawal Plan amount by 3-5% every year to keep up with inflation.
- Not all funds allow Systematic Withdrawal Plan: Most regular mutual funds do but always check the scheme information document before investing in Systematic Withdrawal Plan.
Conclusion: Is Systematic Withdrawal Plan right for your retirement?
Here’s my take. If you are retired or retiring soon and you want a monthly income without the tension of managing tenants or the disappointment of low FD returns Systematic Withdrawal Plan is definitely worth exploring. Systematic Withdrawal Plan gives you flexibility, tax efficiency and the chance for your money to keep growing even while you spend with Systematic Withdrawal Plan.
This is a big but do not set up a Systematic Withdrawal Plan without understanding the fund you’re choosing and without keeping that emergency cash buffer for Systematic Withdrawal Plan. Talk to an advisor run some numbers and start with a smaller withdrawal rate than you think you need for Systematic Withdrawal Plan. Then adjust after a year or two for Systematic Withdrawal Plan.
Truth be told retirement should be about peace of mind, not spreadsheets and tension. A planned Systematic Withdrawal Plan can give you both a monthly “salary” and the sleep that your money won’t run out before you do with Systematic Withdrawal Plan.
Disclaimer: This article is for educational purposes only. Mutual fund investments are subject to market risks. Past performance does not guarantee future returns. Please consult a registered financial advisor before making any investment decisions.