SIP+SWP: Investment advisors often say that starting investing early is important as it can help build a large corpus. When we hear such suggestions, we never see charts of statistics where we can actually see how much difference early investing can make. We often think that a delay of 3–4 years may cost a few lakhs, and it won't matter much to the retirement corpus at 60. But that's quite the opposite. Late investing makes a huge difference in long-term investment. Your delay of a few years may cost you crores in corpus.

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E.g., if you invest Rs 5,000 through an SIP for 30 years, here's what you get at the end of 10, 20, and 30 years.

At the end of 10 years, your investment is Rs 6 lakh, and the expected amount is Rs 11.60 lakh.

At the end of 20 years, the investment is Rs 12 lakh, and the expected amount is Rs 50 lakh.

At the end of 30 years, the invested amount is Rs 18 lakh, and the expected amount is Rs 1.76 crore.

You can see that your money grows faster as your investment gets older. 

In this write-up, we will show you what a 10-year delay in investment may mean to you. 

It may not only reduce your corpus by nearly Rs 1.17 crore, but if you opt for a monthly pension through an SWP, the delay can cost you nearly Rs 49,000 a month, and instead of a 30-year pension, you will get it only for 12 years. 

Before moving to that section, know how SIP and SWP work. 

In SIP, you invest a fixed amount in a mutual fund scheme(s), where you buy net asset value (NAV) units every investment cycle. 

SIP investment is based on rupee cost averaging, where you purchase more NAVs when the market is down and buy less when the market is up.

SWP is the opposite of SIP, where you invest a lump sum in a mutual fund and get a fixed monthly pension. 

The fund sells NAVs every withdrawal cycle to provide that pension. 

SWP is also based on rupee cost averaging, where the fund house sells more NAVs when the market is down and less NAVs when the market is up. 

There is a possibility that your investment may deplete if you continue to withdraw your monthly pension through SWP from your mutual fund. 

To negate this problem, the solution is to withdraw less. 

SIP+SWP: How to draw huge pension with small monthly investment?

As we discussed in the beginning, the key is to start investing early. 

You can start a SIP in a mutual fund and continue it for 25–30 years. 

By the time you reach your retirement age or take early retirement, you can use that corpus to invest as a lump sum in a mutual fund and draw a substantial pension every month.

"The SIP should be used to take risk and invest small sums of money in equity funds. Then the corpus so created should be invested in a liquid or money market fund to pay out monthly pensions via SWPs for your post-retirement life," Nehal Mota, Co-Founder & CEO, Finnovate. 

SIP+SWP: How late investing may cost nearly Rs 49K every month

To draw a comparison between how a delay in investment may cost you nearly Rs 49,000 a month in your pension and how you may get that pension for just 12 years instead of 30 years, we take two scenarios.

In scenario 1, you start investing Rs 5,000 a month through an SIP in a mutual fund at the age of 30. 

You invest it for the next 30 years till your retirement age of 60. 

If you get a 12 per annual return on your SIP investments, at the age of 60, you will get a corpus of Rs 1.77 crore on just a Rs 18 lakh investment.

Investor A Amount Investor B Amount
Monthly SIP Rs5,000 Monthly SIP Rs5,000
Tenure 30 years Tenure 20 Years
CAGR Returns 12% CAGR Returns 12%
Corpus at age 60 Rs1.77 crore Corpus at age 60 Rs50 lakhs
Corpus invested Rs1.77 crore Corpus invested Rs50 lakhs
SWP Yield 5% SWP Yield 5%
Monthly Pension  Rs93,800 Monthly Pension  Rs45,000

 Chart Courtesy: Finnovate 

At that age, you can invest that corpus in a mutual fund where you can get a monthly pension through the SWP plan. 

Even if you get just a five per cent return on your Rs 1.77 corpus, this amount will be enough to give you a Rs 93,800 monthly pension for the next 30 years. 

In scenario 2, you start investing at 40 years of age till the retirement age of 60. 

Except for investment duration, your investment amount and the rate of return remain the same: a Rs 5,000 SIP for 20 years and a 12 per cent annual return on the same. 

At the age of 60, here's how your investment sheet will read: Rs 12 lakh investment and Rs 50 lakh total amount. 

Had you started 10 years earlier, you would have invested just Rs 6 lakh more, but on that extra investment, your corpus would have been Rs 1.27 crore more.

Now, since you have a Rs 50 lakh corpus after 20 years of investment and get a five per cent return on it when you invest it in a SWP plan, let alone get a Rs 93,800 monthly pension, even if you draw a Rs 45,000 pension a month, your corpus will last only 12 years in comparison to 30 years of pension after 10 years of extra investment.  

To draw a comparison of getting the same pension—Rs 93,800 in both cases—in a 20-year investment, you will get that pension only for five years.