SIP and SWP for Retirement Planning: Everyone needs a regular income post retirement, but the biggest challenge can be to get it at that stage.

It’s because as you grow older, income options deplete.

Not many of us may have an income source or a pension at that age.

To avoid that situation, one may plan their retirement early in their life.

The early planning can also help you retire early.

If one starts investing in their mid or late 20s, they may create a corpus by their late 40s or early 50s when they may retire and depend on the passive income from their investments.

The combination of a systematic investment plan (SIP) and a systematic withdrawal plan (SWP) can be one such option, where starting with a small monthly investment, one may draw a sizeable pension.

In this write-up, know what SIP and SWP are and how one can invest Rs 15,000 monthly SIP for 25 years to draw an approximately Rs 1,67,000 monthly income for 30 years.

Why one should start retirement planning early

If someone is doing a job, they most likely have 30-35 years of working years, where they need to plan for their every financial goal.

So, if one plans their retirement in the early phase of life, they can retire early.

On the other hand, if they have limited income, they can achieve a retirement corpus goal with a smaller amount compared to the one who starts late.

Benefits of retirement planning

If one has generated a retirement fund that can take care of their retirement needs, they don’t need to depend on others for their expenses. They will have financial freedom in their retirement life.

SIP investment for retirement corpus

SIP is a systematic investment where one can start with as little an amount as Rs 100 a month.

They may increase the amount as their income rises.

They may revise their strategy as per market conditions.

For a salaried-class person, it may not be easy to invest a large amount one time.

So, they may go for periodic SIP investments where they can also choose the tenure alongside the amount.

SWP for retirement planning 

If you have created a retirement corpus from SIP investment, two things may happen at retirement.

You may not need the entire amount in one go, and you may want to withdraw it in phases such as monthly.

Second, there may be a chance that the market is down when you want to withdraw the lump sum amount.

To avoid that situation, you may want to park that amount at a place from where it grows and provides you with a monthly income. For such a situation, SWP in mutual funds may be used. 

How SWP may work for retirement planning

Here, you can deposit all your retirement corpus in a conservative mutual fund, which may give you a 6-7 per cent annualised return.

You can mandate the fund house to provide you a fixed monthly income from the fund.

It sells units from your investment to provide you that income.

Even though the fund house will provide you a fixed income, your investment will keep growing.

So, you may get the monthly income through SWP for decades.

Calculations for story

Our calculation will have 2 phases.

In the first phase, we will show what the corpus will be created from a Rs 15,000 monthly SIP for 25 years at a 12 per cent annualised return.

In the second phase, we will show one may draw a Rs 1,66,950 monthly income from it for 30 years. So, it’s like a 25-year-old generating a corpus from a Rs 15,000 monthly SIP investment till the age of 50 and then withdrawing a monthly amount till the age of 80.

Corpus from Rs 15,000 monthly SIP investment

If we invest Rs 15,000 a month for 25 years, the total investment will be Rs 45,00,000, and the estimated corpus will be Rs 2,84,64,526.

Income tax on retirement corpus

Though the tax calculation of SIP investment is done on the basis of the NAV purchase and sell rates, here we are creating a projection.

For SIP investment, there will be long term capital gain (LTCG) tax and short term capital gain (STCG) tax.

For LTCG, there is a Rs 1,25,000 tax exemption, and after that, the tax rate is 12.5 per cent. For STCG, the tax is a flat 20 per cent.  

The approximate tax on Rs 2,84,64,526 will be Rs 32,19,507.175. After paying tax, the remaining amount will be Rs 2,52,45,019, which can be used for SWP.

Rs 1,67,000 monthly income for 30 years

If one invests Rs 2,52,45,019 in a mix of conservative and hybrid mutual funds, from where their expected return is 7 per cent, they may withdraw Rs 166,950 for 30 years.

After drawing that monthly amount, the balance amount will be Rs 38,875, while the total withdrawn amount in 30 years will be Rs 6,01,02,000.

(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)