Systematic Withdrawal Plan (SWP): A Practical Guide
What is an SWP?
A Systematic Withdrawal Plan (SWP) lets you periodically withdraw a fixed amount from an investment (typically mutual funds, ETFs or portfolios) — for example monthly or quarterly. SWP is commonly used by retirees or investors who want steady income while keeping the remainder invested.
Why use an SWP?
- Provides predictable cashflow (monthly/quarterly).
- Maintains some investment exposure to potential growth.
- More tax-efficient than selling large chunks of equities at once (depends on local tax rules).
- Flexible — you can change withdrawal amount, frequency or stop withdrawals.
How SWP works (step-by-step)
- Choose the investment (e.g., equity or debt fund).
- Decide withdrawal frequency (monthly, quarterly, annually).
- Set the withdrawal amount (fixed rupee amount or fixed number of units).
- The fund redeems units to pay the withdrawal; remaining units stay invested.
- Review periodically and adjust as needed (increasing or decreasing withdrawal amount).
Worked example (numbers you can trust)
Assumptions for this example:
- Starting portfolio: ₹5,000,000
- Assumed annual return: 6% (compounded annually for simplicity)
- Withdrawal: ₹40,000 per month = ₹480,000 per year
We compute end-of-year balances assuming each year the portfolio first earns the yearly return, then the total annual withdrawal is taken. (This simple method is useful for clarity and planning.)
| Year | Starting Balance (₹) | Annual Gain @6% (₹) | Withdrawn (₹) | End Balance (₹) |
|---|---|---|---|---|
| 1 | 5,000,000.00 | 300,000.00 | 480,000.00 | 4,820,000.00 |
| 2 | 4,820,000.00 | 289,200.00 | 480,000.00 | 4,629,200.00 |
| 3 | 4,629,200.00 | 277,752.00 | 480,000.00 | 4,426,952.00 |
| 4 | 4,426,952.00 | 265,617.12 | 480,000.00 | 4,212,569.12 |
| 5 | 4,212,569.12 | 252,754.15 | 480,000.00 | 3,985,323.27 |
Interpretation: With a 6% return, withdrawing ₹480,000/year slowly reduces the portfolio — it falls from ₹5,000,000 to about ₹3,985,323 after 5 years under these assumptions. If you withdraw less (for example the classic 4% rule = ₹200,000/year for this portfolio), the capital can remain stable or even grow depending on returns.
Practical tips to manage SWP
- Choose withdrawal amount conservatively: start lower, then increase if comfortable.
- Diversify investments: mix debt and equity to balance income and growth potential.
- Check tax implications: redemptions from funds may trigger capital gains — consult your tax advisor.
- Revisit annually: rebalance the portfolio and adjust withdrawal rate to market reality and inflation.
- Emergency buffer: keep 6–12 months of expenses in liquid assets to avoid forced selling.
Pros & Cons — quick view
Pros
- Predictable income stream
- Maintains market exposure
- Flexible and adjustable
Cons
- Risk of capital erosion if withdrawals > returns
- Market volatility affects future withdrawals
- Tax and exit loads (if any) need consideration