How much money will last forever in a Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan (SWP) can help you withdraw a fixed sum from your mutual fund or investment account at regular intervals, which is especially beneficial after retirement for meeting day-to-day expenses.

While the benefits of SWP are widely known, investors often have concerns about how much to invest to withdraw through SWP indefinitely. Is it even possible? This article aims to answer this with examples.

But first, let's look at why one should consider an SWP. Why not opt for fixed income options like fixed deposits, post office monthly income schemes, or annuity plans offered by insurance companies? There are two reasons. First, most of these options offer around 6-7% annual returns, which barely manage to beat inflation. So in the long run, the real value of your corpus will keep shrinking.

Second, options like SCSS and POMIS are safe but have investment limits. You cannot invest more than ₹30 lakh in SCSS and more than ₹15 lakh in POMIS. Even if you invest this amount, say in SCSS, the monthly income that you can earn is just around ₹20,000, which is insufficient for most retirees even today.

It is therefore clear that you need a perpetual source of income in which you can not only invest more but also beat inflation. This is where SWP comes in.

SWP allows you to regularly withdraw the amount needed for monthly expenses while enabling the remaining corpus to grow with market-linked returns.

SWP can help you manage your regular income dynamically. It can also help maintain financial stability by not letting you make impulsive, large withdrawals, especially during volatile markets.

Now, coming to the main point of this article: How much money should you invest in SWP so that it lasts forever? Is it even possible?

Yes, it is theoretically possible when your withdrawal rate is equal to the real return on your investment. The real rate of return is the average annual return after adjusting for inflation. For example, if the nominal return is 12% and inflation is 6%, then the real rate of return will be 5.66%. Similarly, if the return on investment is 7% and inflation is 6%, then the real rate of return is just 0.94%.

In case your withdrawal rate is less than the real return rate of the fund, then your corpus will also continue to grow. However, if your withdrawal rate is higher than the return rate, then your corpus will not last forever.

If your fund generates a 5% real return and your withdrawal rate is also 5%, then your corpus will last forever. In finance, this is called perpetual withdrawal. There is also a formula to calculate the amount required for perpetual withdrawal:

For example, suppose you need ₹12,00,000 per month, and the real rate of return is 4%, then the required corpus will be ₹12 lakh/0.04 = ₹3 crore.

In the following table, there are some more examples of the required corpus in various withdrawal amounts and real return expectations:

How does SWP work?

First, you invest a lump sum in a mutual fund of your choice, usually in a balanced fund. Then choose the withdrawal amount and frequency. After this units from your investment will be sold each month to help you maintain the monthly cash flow while the balance units continue to grow.

Points to note before starting a SWP

SWP gives the flexibility to invest in multiple asset classes like equity, debt, gold, etc. But finding the right fund can be tricky. Therefore, it is advised to take suggestions from an experienced and qualified financial advisor.

One should ideally have conservative real return expectations for a perpetual SWP.

One should ensure that withdrawals keep pace with inflation to maintain purchasing power.

One should account for taxes and fund management charges while setting up an SWP.

Periodic review and adjustment may also be required as investment returns, as well as inflation, can fluctuate in different market and economic cycles.