Enjoy the second half of your career!
Enjoy the second half of your career!
The majority of us view retirement as a moving target. When we are young, we want to retire quickly and explore the world, but as we get older, we realise that we are not financially ready to do so, so we keep moving the retirement date forward! The difficulty is increasingly in providing for the extended periods of non-working life that lie ahead rather than just making money during the working years. Because of improved healthcare, life expectancy is increasing, which implies the amount of time spent not working could increase to 30 years or more!
That’s why we need to have more conversations about this ticking time bomb, especially because the majority of us don’t even have guaranteed pensions and are responsible for making the right retirement investments. Regardless of your occupation, we will all eventually retire, either voluntarily or by necessity. And giving up the kind of life we have grown accustomed to is rarely an option.
increased costs
As the cost of living rises owing to inflation, you will also need to account for rising costs for healthcare, carers, children’s education, marriage, and older people’s lifestyle requirements.
You may no longer think that you can be financially dependent on your children due to the shifting dynamics of society. In fact, they could not even be in the same city or nation as you in the majority of circumstances. So, when making plans for your retirement years, you must also take this into account.
accumulation and depletion
The two main stages of retirement planning are. Buildup and decline. The SIP method, which has grown so popular that many investors believe it is distinct from mutual funds, can be used for the accumulation phase. To take advantage of the power of compounding during the accumulation period, it is advised to invest a larger percentage of your funds in equity. By investing little sums frequently through a SIP, you might potentially build up a corpus by the time you retire.
However, the main difficulty is figuring out how to withdraw money from your investments to cover your monthly expenses after retirement. An equally effective strategy that provides a monthly dividend to assist you survive your retirement years is far less well-known.
SWP advantages
The main advantage of a Systematic Withdrawal Plan, or SWP, is discipline, which is similar to a SIP. In the same way that we invest in SIP with discipline, we also withdraw from SWP with discipline. The biggest error most individuals make is spending their retirement savings, which leaves them scrambling to find a steady source of income to cover their living expenses.
The Systematic Withdrawal Plan, or SWP, is one way to access your investments when you need cash. When you retire or when you take your sabbatical, this may happen! The bills may still be arriving even if you are not working. Therefore, you require a regular source of income to pay your bills and for other expenses. SWP is practical.
The money is easily transferred to your bank account once you provide your mutual fund a one-time order to debit a specific fixed amount on a set date of the month. When you withdraw money, a portion of your original capital and your earnings are returned to you, which is seen as tax efficient. No tax is due on the capital that is being returned to you, and if you are withdrawing from an equity or hybrid fund, your tax rate on gains might be as low as 10%. Gains from a mutual fund that holds at least 65% or more equity are now subject to a 10% tax on a one-year holding period.
Your advisor can help you determine the correct combination of capital returned and gains made, and mutual funds themselves can also offer advice. The most crucial point to keep in mind is that, as you approach closer to retirement, you should switch to a hybrid fund product that not only has debt but also equity components and is less volatile than equity funds because bills never stop!
The remaining funds remain invested and continue to generate returns, enabling you to carry on with compounding. Of course, you can withdraw a lump payment as well for any specific aim you may have, as long as your monthly needs are taken into account.
For instance, if your typical monthly spend is Rs 1 lakh and you have a corpus of Rs 1 crore, you want to execute an SWP for 20 years.
According to historical statistics, an investment of Rs 1 crore in the Nifty 50 on March 1, 2003, with a monthly withdrawal of Rs 1 lakh, produced an approximate 18% XIRR (Source: NSE indexes, internal study).
Accordingly, in the aforementioned example, you withdrew around Rs 2.4 crores at a rate of Rs 1 lac per month for 20 years and still had Rs 10.75 crore in corpus (as of March 31, 2023)!
The aforementioned serves to demonstrate the power of compounding. This should not be interpreted as a mutual fund’s indicative yield or performance. The returns will fluctuate from time to time and depend on a number of variables, such as market movement, the date and length of the investment, etc. Performance in the past might or might not continue in the future.
You might give this to a loved one or donate it to a cause that is near to your heart. In either case, you’ll have financial independence during your retirement years. Mutual funds provide this service. Therefore, SWP may be a good option if you wish to receive a monthly dividend from your accumulated investments.
