SWP: Rs 1 cr investment; over Rs 41K monthly pension for 16 years and corpus remains same; know how is it possible

When we think about retirement, we think of a life where we get a regular monthly pension to meet our daily expenses; where we don't have to depend on others' money; where we can say confidently that we have the financial freedom to live on our own terms. If you retire at 60, you aspire to receive monthly pension for years so that your rest of life is spent peacefully. There are many ways to get a monthly pension. One of the prominant ways is the systematic withdrawal plan (SWP).

In a SWP, you invest a lump sum amount in a mutual fund and get a fixed monthly pension from its returns.

ALSO READ | SIP+SWP: Start with 5K SIP and then get Rs 93.80K pension for 30 years; know calculations

If you plan your SWP in a way where your monthly pension is lower than your returns on investment, not only you can get a lifelong pension, but also your balance amount after withdrawing pension for years can be equal to your principal, or in some cases, can even be bigger than that.

We will tell you about a calculation, where, if you invest Rs 1 crore and take a monthly pension of Rs 41,667 for 16 consecutive years, your balance will remain Rs 1 crore. But before that, know how SWP works-

What is SWP?

When you invest in a mutual fund, you purchase NAVs.

In a SWP plan, the fund house sell NAVs of a particular amount and give the investor the monthly pension.

ALSO READ | Post Office Monthly Income Scheme: How to earn Rs 5,550, Rs 7,400 or Rs 9,250 monthly income by investing in this post office scheme; calculations will surprise you

If the market is performing poorly and the rate of NAV is low, the fund house will sell more NAVs, if the rate of the NAV is high, it will sell less.

But it will give the investor a fixed amount every month.

"In an SWP, there are few key decisions to make. The first is how many years you want the pension to last. The second is at what  yield you want it to last. Ideally pay yourself a good pension up to the age of 75-80 years of age. So, if you retire at 60, then the pension should pay you for another 15-20 years and you should structure the SWP accordingly," said Nehal Mota, Co-Founder & CEO, Finnovate. 

Won't one's investment deplete after taking regular pension?

It will deplete if the rate of withdrawal is more than the rate of return.

So, the ideal situation is that you keep the rate of withdrawal much lower than the rate of return.

ALSO READ | 5 International Mutual Funds with Highest Returns in 1 year: Rs 1 lakh investment has turned into Rs 1.77 lakh in this fund

E.g., if the rate of return is 10 per cent annually, your rate of withdrawal should be 6 to 7 per cent.

Also, is it better to stay away from high-risk mutual fund investment?

"You cannot take risk with that money, so equity is virtually ruled out. Even in debt, it should be debt that has low levels of default and interest risk. Which is why, liquid funds or money market funds would be the best choice and you should target returns of around 5% at a conservative level. Anything above that is icing on the cake," says Nehal. 

How to get over Rs 41K monthly pension without depleting invested amount

If you want to get Rs 41,667 monthly pension for 16 years and want to keep your balance the same as the invested principal, you need to invest a lump sum amount of Rs 1 crore.

ALSO READ | Senior Citizens Savings Scheme Account (SCSS): How Rs 10 lakh, Rs 20 lakh, Rs 30 lakh investment will become Rs 14.10 lakh, Rs 28.20 lakh and Rs 42.30 lakh

Since the Rs 1 crore amount is huge, you can start investing early in mutual funds, and even if you make a Rs 10,000 SIP every month and get a 12 per cent return on that, you can build a corpus of Rs 1 crore in 20 years.

So, the ideal situation can be to build a Rs 1 crore corpus when you are earning, and invest the same for a SWP post retirement.

As per expert calculation, even if you get a five per cent return on Rs 1 crore investment, you can withdraw Rs 41,667 pension for 16 years.

ALSO READ | How NPS investment can help you pay zero tax on Rs 10 lakh salary; examples included

After that period, you will still be left with Rs 1 crore corpus.

Chart Courtesy: Finnovate

It happens because the withdrawal amount is less than the returns every month. 

In a second scenario, you can have Rs 75,000 monthly pension for 16 years after investing Rs 1 crore in lump sum.

However, after 16 years, you will be left only with a balance amount of Rs 53,366.