How does SWP work?

How does SWP work?

SWP (Systematic Withdrawal Plan): Creating a recurring order to withdraw a fixed amount of money on a monthly basis. It works like the opposite of a SIP (Systematic Investment Plan).

SWP helps individuals in retirement to cover their daily expenses.

In India, 60 years is generally considered the retirement age, and most retirees choose Fixed Deposits (FDs) to secure their savings. The interest generated from these FDs is typically used to cover daily expenses.

Let's decode SWP in Mutual Funds vs Fixed Deposits.

At the age of 60, if an individual saved around 2 Crore rupees for retirement, considering daily expenses at ₹60,000 per month, the SWP should be ₹60,000.

FD provides a return of 6% on average, while Nifty50 Mutual Fund has a CAGR of 13% historically.

Over the next 20 years:

- If you continue an SWP of ₹60,000 with investments in FD, the final value of ₹2Cr will be ₹3.69 Crores.

FD returns calculations is on annual basis

- If you choose Mutual Funds as an investment vehicle and an SWP of ₹60,000, the final value of ₹2 Crore will be ₹16.87 Crores, which is around 4x the returns of FD.

MF returns are predictions

Just a change in mindset and investment vehicle helps you generate more value.

What if we consider inflation?

Consider 7% yearly inflation, so the SWP should be increased by 7% Y-o-Y.

With inflation:

- FD investment will be ₹1.49 Crore in 20 years. Current value has declined by 25%

Inflation at 7% and Tax rate at 10% - Final value declined by 25%

- MF investment will be ₹13.22 Crores, which is around 9x the returns of FD.

Investing into MF will help us to leave a fortune to our children

"Generating more value requires sensible thinking over pessimistic doubting."

Rambabu Mekala

Data Engineering Senior Analyst

2w

Love this resolution on Financial Awareness , out of which SWP is best for retirement. Very useful content.

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