Sourced with thanks from financialexpress.com
During retirement it’s important to settle down to a planned withdrawal of funds from your corpus to meet your expense requirements. How much you withdraw and how you set up the withdrawal is the key. There are some tips and suggestions about how to do just that in the article below. Review what the author has to say and see if your plan can benefit from that. Team RetyrSmart
Setting up your withdrawal plan a very important part of your retirement plan
Systematic withdrawal plan (SWP) is a very useful method to withdraw money from your corpus, particularly in the ‘distribution phase’ of your life, i.e., the retirement years. So, to what extent can you draw from your funds?
Let us say you are at age 60, and expect to live 20 years more. You have saved a corpus of Rs1 crore, and wondering how much you can withdraw, post retirement, from your invested corpus in mutual funds. This is dependent on the assumed rate of return from the corpus, as the invested amount, net of withdrawals, will continue to earn from the market.
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Drawing from the kitty
Let’s assume a rate of return of 9% for our discussion. If you withdraw Rs1 lakh per month from your kitty, on a ballpark calculation, you would withdraw Rs12 lakh per year and the earnings in your fund at 9% will be Rs9 lakh per year. Ignoring the finer technicalities of the calculation, you would be drawing more from your kitty (Rs12 lakh per year) than what it is earning (Rs9 lakh per year). Even in this scenario, when you are taking away part of your principal every year, the corpus will last 16 to 17 years before it becomes zero. This happens by virtue of the fact that the balance corpus continues to earn from the market.
Provided you do not want to leave a legacy behind for the next generation, your savings are meant for your consumption. Even if you want to have a corpus when you are no more, for the next generation, that can be part of the calculations. To fine-tune the example discussed above, if you want to leave behind half of your savings ,i.e., Rs50 lakh at age 80 and work on the amount of withdrawal, at 9% rate of return, it comes to Rs83,000 per month. That is, even after withdrawing a little more than what your fund is earning, you would be leaving behind half of your kitty for the next generation.
The point is, some people have a psychological block that in an SWP, the monthly withdrawal (or withdrawal at some other frequency) should happen only from what the fund is earning. There is no such requirement from the financial planning perspective. Only if it is a conscious decision to keep the corpus intact for the next generation, that can be built in the plan. In our example, at the assumed rate of return of 9%, the amount is Rs9 lakh per year, i.e., Rs75,000 per month, the corpus will be left intact. If you require some cash flow in the interim, for some contingency, you can do a lump-sum withdrawal from your kitty in mutual funds.
The other relevant aspect, to be built into the calculations, is taxation. The assumed rate of return, 9% in our example, is pre-tax and post-tax return would be lower, depending on the effective rate of tax. SWP is tax efficient. Tax is calculated on FIFO basis, i.e., earlier invested units are redeemed first. Invest in the growth option of mutual fund schemes; for debt funds, start the SWP after three years of holding as there is benefit of indexation and in equity funds start the SWP after one year of holding. In debt funds, though LTCG tax rate is 20%, post indexation the tax rate comes down significantly. In equity funds, capital gains up to Rs1 lakh per financial year is free from tax and depending on your quantum of SWP, if the gains are less than Rs1 lakh, it becomes tax-free.