SIP+SWP For Retirement Planning: Rs 13,000 monthly SIP investment for 25 years, then Rs 1,58,000 monthly income for 25 years; know how it is possible
Retirement Planning: Retirement is long-term planning, where one can start investing early in their career and reap the benefits after creating a corpus. The combination of Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) is one such combination, where one can create a corpus in the early stage of their career and withdraw it in phases post retirement.
SIP+SWP Retirement Planning: Are you 25 and have joined a job recently, or are you 30 or 35 and still thinking of creating a retirement corpus? While it's always good to start investing early in life, if you have delayed, you don't need to be disappointed. You just need to start investing, stay into it for a long time, get average returns, create a retirement corpus, and withdraw it in the form of the monthly income. This is possible through the combination of systematic investment plan (SIP) and systematic withdrawal plan (SWP), where in the first stage of the retirement planning, one invests, and in the second stage, you withdraw the same amount along with growth on the corpus.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
What is SIP?
SIP is a method to invest in mutual funds where the investor invests a predetermined amount every investment cycle that can be daily, weekly, monthly, or yearly. The mutual fund house issues net asset value (NAV) units of the same amount. The rate of NAV rises and falls with market fluctuations. So, the investor buys a different number of units every investment cycle. This process is known as rupee cost averaging. Because of compounding in the long run, SIP investors can create a large corpus.
What is SWP?
SWP is the process of withdrawing the corpus in phases. One invests a lump sum amount in a mutual fund scheme and instructs the mutual fund house to sell the NAVs of a fixed amount from it every month, and deposit it to the account. While the investor withdraws their amount in phases, they also get growth on this investment. So, if the rate of growth is higher than the rate of withdrawal, they can withdraw the amount for decades.
What is SWP?
One can set up SWP in equity, hybrid, or debt mutual funds, but it is good to start SWP in a fund with the least exposure to the market, i.e., a debt fund or conservative hybrid fund. SWP also provides rupee cost averaging, where the fund house sells fewer NAVs when the market is up and the unit price is high and sells more when the price is down.
How SIP and SWP can work for retirement planning
SIP is one of the effective ways to create a retirement corpus. One can start SIP with as little as Rs 100. They can start SIP as per their monthly income and can increase the amount as their income rises. The key to creating a large corpus is to stay in investment for a long time. For that, a good practice is to start investing early in one's career.
How SIP and SWP can work for retirement planning
Once the retirement corpus is built through SIP, the same can be withdrawn in the form of monthly income through SWP. The advantage of withdrawing it through SWP can be that one also gets growth on their corpus while withdrawing it. They can increase or decrease the withdrawal amount as per their needs.
SIP calculations
For our calculations, we will take the example of Rs 13,000 monthly SIP investment for 25 years. It means if one starts investing at 25 years of age, they need to make the SIP investment till 50.
Rate of SIP return
We will calculate at 12 per cent annualised growth on the investment.
What will be retirement corpus in 25 years?
Estimated capital gains on the investment will be Rs 2,07,69,256, and the estimated corpus will be Rs 2,46,69,256.
What one needs to do from here?
They need to invest the same amount in a mutual fund and start SWP from there.
What can be expected return from SWP investment?
Here, the important factor to know is that the accumulated corpus is for retirement, so one can't take a risk on it. They can invest it in a debt or conservative hybrid fund, where the expected annualised rate of return can be 6 per cent.
What will be monthly income from SWP?
The monthly income through this investment is Rs 158,000.
For how many years, can one withdraw this monthly income?
The estimated duration is 25 years.
What will be balance after 25 years?
The total withdrawn pension in 25 years will be Rs 4,74,00,000, and the remaining amount after withdrawing that amount will be Rs 1,06,972.