SIP+SWP: Rs 21,000 monthly SIP investment for 20 years and then Rs 1,20,000 monthly income for 43 years; know it can be possible
Retirement Planning: One can build a retirement corpus by using the SIP investment method in mutual funds. After the corpus target is achieved, the same can be used for withdrawal in phases through the Systematic Withdrawal Plan (SWP).
SIP+SWP, Retirement Planning, financial freedom: Slow and steady wins the race. The proverb holds true in investment too. When you are investing, it's not the large amount, but consistency in the long term that matters more. Even if your monthly investment is small but the duration is long, you can build a larger corpus compared to an investor with a much larger amount than you but with a much shorter duration. Building a large corpus through a systematic investment plan (SIP) in mutual funds and withdrawing it through a systematic withdrawal plan (SWP) can be used to achieve financial freedom in retirement age. In this write-up, we will tell you how through a Rs 21,000 monthly SIP investment for 20 years, one can build a corpus that can be enough to give them a Rs 1,20,000 monthly income for the next 43 years.
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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.)
How SIP works?
It is a method to invest in a mutual fund where one deposits a fixed amount every investment cycle, which can be daily, weekly, monthly, or yearly. When you invest that money, the mutual fund house issues you net asset value (NAV) units of the same amount.
How SIP works?
The performance of this unit depends on the assets that the scheme has invested its money in. The rate of NAV increases or decreases every month. So, when the price of the NAV is high, you buy fewer units; when its price is low, you buy more.
How SIP works?
This process is known as rupee-cost averaging. Due to it, one doesn't need to time market. SIP is a popular tool to create wealth in the long run.
What is SWP?
In SIP, you build a corpus, and through SWP, you withdraw that money in phases. Here, you invest a lump sum amount in a mutual fund scheme. The fund house issues you NAVs. You tell them to credit a certain amount to your account every month.
What is SWP?
The fund house sells NAVs in the same proportion every month to give you that amount. The rupee cost averaging works here also. When the price of the NAV is high, the fund house sells fewer NAVs, and when the market is low, it sells more.
What is SWP?
Mutual fund investors use this method to get monthly income. Senior citizens also use it to get a monthly pension post retirement. Since one invests in a mutual fund scheme, their money also grows with time. So, if the rate of the withdrawal is lower than the growth of the fund, one can withdraw monthly income for decades, and still they may have more in their fund than their principal amount.
SIP investment conditions
Here, we will calculate for Rs 21,000 monthly SIP investment for 20 years. The annualised rate of growth will be 12 per cent.
What will be SIP returns?
At Rs 21,000 monthly SIP investment, the investment in 20 years will be Rs 50,40,000, the estimated long-term capital gains will be Rs 1,42,77,004, and the expected amount will be Rs 1,93,17,004.
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 17,69,000.5. So the post tax expected amount will be Rs 1,75,48,003.5. This is the amount that one can invest in a mutual fund scheme where they want to set up a SWP plan.
SWP investment conditions
We are expecting an 8 per cent annualised return on the invested amount of 1,75,48,003.5.
What can be monthly income through SWP?
After that investment, one can get a monthly income of Rs 1,20,000 for an estimated 43 years.
What will be the balance after 45 years?
In 43 years, the estimated withdrawn amount will be Rs 6,19,20,000. The estimated total will be Rs 6,24,03,658.
Even after withdrawing monthly income for 43 years, the estimated balance will be Rs 4,83,658.
Can one get a higher monthly income than Rs 1,20,000?
It depends on returns, if instead of 8%, one gets 9% return on 1,75,48,003.5, they can Rs 1,33,400 for an estimated 43 years.