By 2050, 20% of India’s citizens will be above 60 years of age according to United Nations, but only 25% of them have some plans in place to take of their golden years or have some form of pension cover.
Since we are complacent about retirement planning, let’s try to shake you out of your slumber.
How much do you need at retirement to maintain the same lifestyle that you have at present?
If your monthly expense is Rs 50,000, and you retire 30 years from now, you will need Rs 2.80 lakh every month, assuming an annual inflation rate of 6%.
Unlike developed countries where there is some form of social security benefit. We do not have that luxury so we can’t sit back and relax. Traditionally, our parents and elderly family members have taken care of their golden years by:
- Investing in real estate and living off the rental income.
- Investing their life earnings in FDs and living off the interest.
- Depending on their children to support them during their retirement.
- Civil servants and army personnel get pension. However, private sector employees and business people do not have this option.
Can we follow the same approach as our parents’ generation?
- Rental yields for residential properties are in the range of only 2.5-3%. This means a property worth 1 crore generates an income of only around 2.5-3 lakhs. A sector that has not been showing satisfactory growth lately. Moreover, this sector is highly cyclical in nature so investments in real estate can become illiquid when liquidity is needed most.
- The rates of interest on Fixed Deposits have fallen.
- There is a shift from traditional social structures such as joint families and extended community support post-retirement to nuclear families across India.
- For central and state government employees, the government has moved from the fixed pension amount to defined benefit, pay as you go pension scheme.
So how can we go about living our dreams, travel the world and retire early without jeopardizing our future? Most of us are aware of SIP and what about SWP?
Systematic Withdrawal Plan
An SWP allows you to redeem your investment from a mutual fund scheme at regular intervals. Unlike lump sum withdrawals, SWP enables you to withdraw money in installments. It is similar to a Systematic Investment Plan (SIP). In SIP, you channel your bank account savings into the preferred mutual fund scheme. Whereas in SWP, you direct your investments from the plan to the savings bank account. It is one of the strategies to deal with market fluctuations.
Systematic Withdrawal Plan allows you to customize the cash flow as per your requirements. You can also choose to either withdraw just the capital gains on your investment or a fixed amount. This way, you will have your money invested in the scheme and still be able to access regular income and returns.
An SWP allows an investor to withdraw from their mutual fund scheme every month on an already set date. This withdrawal could be a fixed or variable amount and the withdrawal can be either annually, semi-annually, quarterly, or even monthly. This can provide you a fixed income every month that will come directly to your bank account.
Benefits of SWP
- Make Regular Flows of Income: Through SWP, an investor can make regular withdrawals from his/her existing investment. It helps you to redeem your investment into actual cash flow.
- Good Option for Retirement Plan: SWP is possibly a good facility for your retirement as it helps you to redeem regular cash flow from your existing investment.
- On Going Investment: While SWP withdraws a fixed amount regularly from your existing investment, your remaining amount remains invested and gives you a chance to earn a better return.