Systematic Investment Plans help build wealth, but Systematic Withdrawal Plans provide regular income. If you have Rs 1 crore at age 60, withdrawing Rs 50,000 monthly at 8% returns lasts 30 years. However, inflation erodes purchasing power, so many experts suggest planning for rising costs to keep your money safe.
Systematic Investment Plans (SIPs) in mutual funds have become a popular way for investors to build long-term wealth. However, investing is only one part of the financial journey. It is also important to know how to generate a steady income from accumulated wealth. This is where a Systematic Withdrawal Plan (SWP) comes into play. While SIPs help investors accumulate wealth over time, SWPs allow them to withdraw a fixed amount at regular intervals.
Imagine you are 60 and sitting on a corpus worth Rs 1 crore and you wish to start your SWPs with Rs 50,000 withdrawals per month. How long will it last?
There are many online SWP calculators that can help you get a fair idea. While the final returns and withdrawals can be impacted by many factors, a typical set up may look like this:
Initial value: Rs 1 crore
Returns: 8% p.a.
Monthly withdrawal: Rs 50,000
Time period: 30 years
Total Withdrawals: Rs 1,80,00,000
Final Value: Rs 3,43,42,538
As per this calculation, one can keep withdrawing Rs 50,000 for 30 years and still be left with Rs 3.43 crore corpus. This is estimated while your corpus keeps earning 8% returns.
However, withdrawing Rs 50,000 per month is not sustainable for 30 years. This is because as the cost of living rises, inflation keeps eroding the purchasing power of money. As a result, what you can buy with Rs 50,000 today, may not be sufficient as time passes by.
So when making SWP plans, it is also important to consider the impact of inflation.
Initial investment: Rs 1 crore
Inflation: 6%
Age: 60 years
Returns: 8%
Current expenses: Rs 50,000
Year 1 Corpus: Rs 1,08,00,000
Cash flow: Rs 1 lakh
Corpus value after cash flow: Rs 1,02,00,000
Similarly, in the second year, you may end up withdrawing Rs 6,36,000 to sustain your purchasing power due to inflation.
Over time, your corpus will reduce, while the cash flow requirement will increase. If you start with Rs 1 crore investment and Rs 6 lakh initial year withdrawal, your corpus will last around 21 years.
In the final year, your monthly cash flow requirement will be Rs 19,24,281, while the balance will be Rs 13.10 lakh.
This shows how inflation can impact your final corpus. If you want your SWP to cover expenses for additional years, you may have to start with a higher amount or invest in more riskier assets, where returns may be higher. You need to account for tax implications, which were not considered in these calculations.