SIP+SWP Combo: Rs 14,000 monthly SIP investment till 50 years of age, then Rs 170,000 monthly income for next 25 years; know it can work
SIP+SWP: Systematic Investment Plan (SIP) in mutual fund is one of the ways to generate a retirement corpus in the long run. The same amount, instead of withdrawing as a lump sum can be withdrawn in phases through Systematic Withdrawal Plan (SWP). In both phases, the investor gets return on their corpus.
SIP+SWP For Retirement Corpus Planning: Investment for retirement is a long-term process. It should not be started in a hurry, but it should be started early in life so one can get the maximum benefit of compounding on their investments. The advantage of starting retirement planning early is that one can generate a sizeable corpus despite a low-amount monthly or lump sum investment. Systematic Investment Plan (SIP) in mutual funds can be one of the effective ways to generate a retirement corpus. The same amount can be withdrawn in phases through Systematic Withdrawal Plan (SWP). If the rate of growth is higher than the rate of withdrawal, the SWP investor can withdraw monthly income for decades, and that too a much larger amount than the SIP amount. Know how this combination works.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for retirement planning.)
How SIP works in building retirement corpus
SIP in a process where the investor can invest a fixed amount every investment cycle. Most investors prefer a monthly SIP as it matches with their earnings cycle. In SIP, one can increase the amount as per growth in their income. One can stop and restart SIP. SIP investment can work effectively for retirement corpus building in the long run.
Example of SIP for retirement planning
A person starts a Rs 5,000 monthly SIP at 25 years of age and wants to run it for 30 years with expectations of 12 per cent annualised growth.
The invested amount in 30 years will be Rs 18,00,000, long-term capital gains will be Rs 1,58,49,569, and the expected corpus will be Rs 1,76,49,569. From an Rs 18 lakh investment to an Rs 1.59 crore corpus, the journey becomes possible because of the power of compounding.
Example of Step up SIP for retirement planning
Another person starts Rs 5,000 monthly SIP investment at 25 years of age. They decide to increase yearly investment by 5 per cent and continue their investment for 30 years.
Example of Step up SIP for retirement planning
The invested amount in 30 years will be Rs 39,86,331, estimated capital gains will be Rs 2,23,80,699, and the estimated corpus will be Rs 2,63,67,030. A 5 per cent increase in SIP investment every year boosted the corpus by Rs 90 lakh with Rs 21,86,331 extra investment.
What is SWP?
SWP is just opposite to SIP. Here, an investor invests a lump sum amount in a mutual fund and withdraws it in phases, like monthly, quarterly, or yearly. Withdrawal in phases saves the amount to quite a large extent from sharp market fluctuations, and the investor also gets growth on the corpus. So, the overall withdrawal amount is significantly larger than the invested amount.
Example of SWP in retirement planning
E.g., a person invests Rs 1,00,00,000 in a debt mutual fund and expects 6 per cent annualised return on that. They can withdraw Rs 83,500 monthly income for 15 years. The sum of the total withdrawal and the balance will be Rs 1,51,66,156 after that period.
Calculations of SIP and SWP
For our story, we will take the example of a 25-year-old investor who starts Rs 14,000 monthly SIP investment and runs it for 25 years. The expected return on it is 12 per cent. After creating a corpus, they start a SWP from the same amount, where the annualised rate of return will be 6 per cent.
What will be SIP investment?
The invested amount in 25 years will be Rs 42,00,000.
What will be SIP retirement corpus?
The expected capital gains from this amount in 25 years will be Rs 2,23,66,891. and the expected corpus will be Rs 2,65,66,891.
What will be SWP investment amount?
The SWP investment amount will be Rs 2,65,66,891.
What is expected monthly income?
At 6 per cent annualised return, the expected monthly income will be Rs 1,70,000.
For how many years, can they withdraw it?
The investor can withdraw it for 25 years.
What will be total withdrawn amount?
The expected withdrawn amount in those 25 years will be Rs 5,10,00,000, the estimated balance after withdrawing that monthly income will be Rs 2,22,347, and the grand total will be Rs 5,12,22,347.