Retirement Panning: From Rs 5,000 monthly SIP to Rs 1 lakh monthly pension; know how SIP and SWP combo may work for you

Retirement Planning: Mutual fund investment through systematic investment plan (SIPs) is more popular than lump sum investment in India, given the Association of Mutual Funds in India data for the last one year. The key reasons behind this are that one can start with a small monthly investment of Rs 100. The SIP investment provides rupee cost-averaging as well as compound growth. The benefit of compound growth is that a small monthly SIP contribution can help one build a large retirement corpus if one stays in investment for a long period of time.

If one builds a huge corpus running into crores, that can be used to draw a sizeable monthly pension for many decades, even if they get modest returns on this fund.

If one starts with a monthly SIP of Rs 5,000 and makes it for 30 years, they may build a large corpus of Rs. After paying long-term capital gains tax, if they invest that money in a systematic withdrawal plan (SWP) where they get a modest return of seven per cent, they can get a monthly pension of Rs 1 lakh for 30 years.

Even after that, they will have Rs Rs 62,99,829 in their corpus. In this write-up, learn how it is possible through calculations. Before that, know how both SIP and SWP function.

What is SIP?

A SIP is a method of mutual fund investing.

Unlike in the lump sum method, where one deposits a one-time sum, they invest in a pre-fixed amount through SIP on a daily, monthly, or yearly basis.

Some of the mutual fund schemes offer SIPs as small as Rs 100.

SIP provides rupee cost averaging since the price of an NAV keeps changing every month, syncing with the performance of the mutual fund scheme.

An investor buys more NAVs when the market and NAV rates are down.

When the market is up and the NAV rate is also higher, the investor buys fewer NAVs.

Like lump sum investments, SIP investments also offer compound growth, so even if you invest a small monthly amount of Rs 1,000, keep investing it for 40 years, and get 12 per cent annual compound growth on it, your Rs 4.80 lakh investment can grow to Rs 1,18,82,420 in that time frame.

Anyone considering SIP as a tool to build a retirement corpus can opt for a long-term investment.

What is SWP?

While in a SIP you invest money every month, in a SWP plan you withdraw money every month from the mutual fund scheme.

One invests a lump sum amount in a mutual fund, chooses SWP as the option, and withdraws a fixed amount.

The fund house sells NAVs every month to give you that money.

Since you get returns on your deposits, even if you get a monthly pension from them, their corpus can give them a monthly income for years.

If the rate of withdrawal is much lower than the rate of return, it can provide the monthly income for many decades.

SWP also offers rupee cost averaging, where the fund sells more NAVs when the rate is down and fewer when the NAV's rate is up. 

How to draw Rs 1 lakh pension starting with Rs 5,000 monthly SIP

If you start a Rs 5,000 SIP at the age of 30 and continue it for 30 years, in that period, your total contributions will be Rs 18,00,000, your long-term capital gains will be Rs 1,58,49,569, and the maturity amount will be Rs 1,76,49,569.

Capital gains are nearly 10 times greater than investments; this is only because of compound growth. At 60, this is your retirement corpus.

If you withdraw it and pay 10 per cent long-term capital gain tax after availing Rs 1 lakh tax exemption, your tax amount will be Rs 17,54,956.90. After paying tax, you will have Rs 1,58,94,612.10 at your end.

Since you will invest it to get a monthly pension, you may pick a debt fund as a safe option, where you get a modest seven per cent return on your investments. 

If you invest Rs 1,58,94,612.10 in a debt fund and get a seven per cent annual return, you can easily draw a monthly pension of Rs 1 lakh for 30 years, and even after that, you will have Rs 62,99,829 as the balance amount in your mutual fund account. 

As you can see, the investment period is 30 years, and it is quite a long one. But retirement planning is easiest when started early. The earlier you start, the higher the corpus you are likely to have and the smallest monthly contribution you may need to make.

(Disclaimer: Calculations are for knowledge purpose only. Do you do your due diligence or consult an expert for your retirement planning)