SIP+SWP: Rs 12,000 monthly SIP investment for 20 years and then Rs 75,000 monthly income for 45 years; know how it is possible
Retirement Planning: Systematic Investment Plan (SIP) can be used to generate a retirement corpus in the long run. Once the financial goal is achieved, the investor can start a systematic withdrawal plan (SWP) to get monthly income for years.
SIP+SWP Combo: Starting investing early has its own advantages. One can build a sizeable corpus by their mid-40s or early-50s, and they can use this corpus to get monthly income. However, to achieve that goal, one needs to be steady in their investing approach. If one does that and gives time for their money to grow, then even a small monthly investment can help them build a large corpus in the long term. Such a goal can be achieved with the combination of Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP). The idea can be to invest Rs 12,000 monthly for 20 years and then get Rs 75,000 monthly income for 45 years. In this write-up, know how SIP and SWP work and how getting a Rs 75,000 monthly pension for 45 years is a possibility.
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(Disclaimer: This is not investment advice. Calculations are projections. Please do your own due diligence or consult an advisor for retirement planning.)
What is SIP?
SIP is a process to invest in mutual funds. Unlike lump sum, where an investor makes a one-time investment, they invest a fixed amount in SIP every investment cycle. The SIP amount can also be increased or decreased.
What is SIP?
One can also opt for step up SIP, where they can increase the amount every year. When one invests in SIP, they purchase the net asset value (NAV) of a mutual fund scheme. The rate of NAV increases or decreases with the rise and fall of the market.
What is SIP?
So, the investor purchases NAV at different rates every investment cycle. This process is known as rupee cost averaging.
What is SWP?
SWP is opposite to SIP. Here, an investor makes a lump sum investment in a mutual fund scheme(s) and gets fixed monthly income. The fund house sells NAVs of the same value from the same fund to provide monthly income to the investor.
What is SWP?
So, when the NAV price is higher, the fund house sells fewer NAVs; when the rate is down, it sells more. Since the fund house is selling NAVs every month, the value of the investment should decrease.
What is SWP?
But since the fund is also growing, the investment increases. If the rate of growth is higher than the rate of withdrawal, then one can get monthly pension for decades.
SIP investment conditions
Here, we will see the projections of Rs 12,000 monthly SIP for 20 years and 12 per cent annualised growth on the corpus.
What will be SIP returns?
The invested amount in 20 years will be Rs 28,80,000, the estimated long-term capital gains will be Rs 81,58,288, and the expected amount will be Rs 1,10,38,288.
What will be income tax on long-term capital gains?
After exemption of Rs 1,25,000 on long-term capital gains and 12.50 per cent tax on the rest of the amount, the estimated income tax will be Rs 10,04,161. So the post tax expected amount will be Rs 1,00,34,127.
SWP investment conditions
An investor needs to invest this amount in a mutual fund and set up a SWP plan to get monthly income. Here, the condition is that one should get 9 per cent annualised return on their investment.
How much monthly income one will get through SWP?
The monthly income will be Rs 75,000. They can get it for 45 years.
What will be the balance after 45 years?
In 45 years, the estimated withdrawn amount will be 4,05,00,000. Even after withdrawing that amount, the estimated balance amount will be Rs 77,64,180.