Retirement planning and securing a regular income during the later stages of life are crucial. While many investors are familiar with Systematic Investment Plans (SIPs), fewer take advantage of another effective strategy — the Systematic Withdrawal Plan (SWP). Offered by mutual funds, an SWP allows investors to withdraw a fixed amount at regular intervals. This makes it an ideal option for senior citizens seeking a steady income post-retirement.
SWP enables investors to redeem their mutual fund units systematically. Instead of withdrawing a lump sum, they can set up a fixed withdrawal schedule. This provides financial stability and helps manage expenses efficiently.
How Does SWP Work?
When an investor opts for SWP, the mutual fund redeems a set number of units periodically. The amount is credited to the investor’s bank account. The remaining units continue to grow based on market performance.
For example, suppose Mr Sharma invests Rs 10 lakh in a balanced mutual fund. He sets up an SWP to withdraw Rs 10,000 per month. Every month, the fund redeems units worth Rs 10,000 and transfers the money to his account. The remaining investment continues to earn returns.
Also Read: Retirement Planning: Why waiting till 60 is no longer the smartest strategy
Why is SWP Beneficial for Senior Citizens?
One of the key challenges senior citizens face post-retirement is the absence of a regular salary. SWP provides a dependable income source, ensuring that retirees do not have to worry about meeting their monthly expenses. This consistent cash flow helps them manage their lifestyle without financial stress.
Another key benefit of SWP is its tax efficiency. Unlike lump-sum withdrawals, which may attract a high tax burden, SWP withdrawals are treated as capital gains. In equity funds, only the gains are taxed, and long-term capital gains tax applies if the investment is held for more than a year. For debt funds, long-term capital gains are taxed at 20% with indexation benefits, making SWP a tax-friendly option compared to traditional fixed deposits.
Flexibility is another advantage of SWP. Investors can choose how much they want to withdraw and how often. If their financial situation changes, they can modify the withdrawal amount or even stop the SWP temporarily. This makes it a highly adaptable option for retirees who want control over their investments.
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