SIP or SWP: Which systematic plan should you choose to safeguard your golden years?

According to a survey conducted by Scripbox in 2022, 80% of urban families are not confident about their post-retirement plans. For most of these families, the source of retirement corpus would be employee provident fund or public provident fund balance that they would have accumulated during their working life.

It is important to understand that though the above investment avenues are good tools for building a portfolio with safety, inflation takes away a huge component of the returns in the longer term due to lower real returns on these avenues.

It is also difficult to invest huge chunks of lump sum funds in mutual funds due to non-availability of large investible corpus. With rising life expectancy in India coupled with falling working span, it is important to start planning for retirement at an early stage with a systematic approach of investing that could ensure regular withdrawals during the golden years of life.

In this article, we are going to discuss how one can plan for a constant cash flow during retirement years by investing systematically in regular intervals.

SIP helps create wealth over the long term. It allows the investor to invest small amounts at regular intervals and these small amounts reduce the impact of volatility in the short term. Historical evidence suggests that returns in equity markets are decent over the medium to long term.

SWPs are the opposite of SIP. A fixed amount is transferred from your mutual fund portfolio to your bank account on a periodic basis. This acts as a sort of pension where regular cash flows help meet expenses during retirement.

Here are some steps you can follow to plan your retirement with SIP and SWP:

Determine your retirement goals: The first step is to determine your retirement goals. How much money do you need for retirement? What lifestyle do you want to maintain? Consider factors such as inflation, health expenses, and other financial obligations.

Assess your current financial situation: Once you know your retirement goals, you need to assess your current financial situation. How much money have you saved for retirement? What is your current investment portfolio? What is your risk tolerance? How much more can you invest monthly for your retirement goal?

Start with the right SIP amount: SIP is a good investment strategy for long-term wealth creation. One must arrive at the right SIP amount that aligns with your retirement goals and risk profile. You can consult a financial advisor to help you assist in calculating this amount.

Opt for SWP: A Systematic Withdrawal Plan (SWP) is a good option to generate regular income during retirement. You can choose the SWP amount, frequency, and duration based on your retirement goals.

Setting the SWP amount: During your retirement years, you will get an idea about what are your monthly expenses & the amount of money required each month to sustain your lifestyle. You can set up an SWP of the amount needed for your monthly routine expenses. You can also increase the amount of SWP on a yearly basis to account for inflation. The process allows you a lot of flexibility to increase or reduce the monthly withdrawals as per needs.

Review your portfolio regularly: It is important to review your portfolio regularly to ensure it is aligned with your retirement goals. You may need to adjust your investment strategy based on your changing financial situation.

Let us look at some examples to understand how SIP & SWP would work:

For the sake of simplicity, we have ignored the inflation calculation. Let us take example of a 30-year-old investor as per above illustration, with a monthly investment of Rs. 7,500 for 30 years (till the age of 60), a corpus of Rs. 2,30,00,000 can be created and a systematic withdrawal of Rs. 1,50,000 per month can be set up for next 20 years to sustain lifestyle expenses. Even after the withdrawals, the corpus still stands at Rs. 2,30,00,000. One can adjust the SWP as per one's needs.

Important point to takeaway is that the earlier you start, lower will be the monthly amount required to be invested in order to achieve retirement goals.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited