SWP

Date Published: November 15, 2024

How SWPs Can Help Retirees Beat Inflation Manage Risks



Planning for sufficient funds once you have no income source is probably one of the most daunting aspects of retirement. A systematic withdrawal plan (SWP) is a good option to help maintain a regular stream of income while ensuring the unused funds continue to grow with time. A systematic withdrawal plan is a feature that allows you to make regular withdrawals of a fixed amount from your mutual fund investments. We also have full control on the amount and frequency of withdrawals. Retirement Planning, well-planned strategy for managing your retirement savings during an Inflationary period, mainly when you are younger, is an essential component of a sound financial plan. If we are planning for the future earlier, we will have enough time to address any challenges and retire peacefully in the interim. However, planning for the future requires that you consider all potential economic risks when making your savings, including inflation risks

Inflation Risk That Affects Retirement Planning:



As time goes on and the price of goods and services rises, Inflation causes your savings and fixed income to lose purchasing power. As a result, our action can impact your living standard, which is particularly problematic for retirees who might discover that they do not have enough savings to maintain their lifestyle when prices rise. When we Indians visit the supermarket to buy food or to the gas station to fill up their car with fuel, they probably think about Inflation in the short term. Inflation affects the prices of consumer goods in a short time, but it also needs to be taken into account when making long-term financial plans, including Retirement Plans. The Inflation rate impacts how much your Retirement Savings will be worth on a personal level. Our savings and income may be significantly devalued over time by Inflation. Inflation affects retirees more than other consumers, and even a modest rate can significantly reduce purchasing power over time. Retirement-age consumers frequently spend more of their income on goods and services greatly affected by inflation, such as housing, food, and medical care. According to some, the issue is most acute for those with fixed incomes, which is frequently the situation for retirees. The pressure of inflation over time can reduce your income's ability to buy things. To have enough assets to last through your later years, we must understand how Inflation may hurt our Retirement Strategy and how we can protect the same.

SWP allows periodic and defined withdrawals from your mutual fund portfolio (selected for SWP), in order to meet your regular income requirements. Typically regular income requirements kick in post-retirement.

Ideal characteristics of SWP initiated from a mutual fund portfolio, include the following:
1. The portfolio should be growth oriented while exhibiting lower risk / volatility that an Equity portfolio. Hence, mutual fund schemes that invest in multi-asset classes (Equity, debt, possibly some exposure to precious metals), such as Balanced Advantage or Multi-asset allocation Funds would be ideal. Also, a class of debt mutual funds, named “Target maturity debt funds”, could be useful to those retirees in the 10% or lower tax brackets.

2. The mutual fund scheme should have favourable tax treatment. Balanced Advantage MF schemes are treated like Equity mutual fund schemes for taxation purposes (hence, long term capital gains are taxed at 12.5% flat). Multi-asset allocation funds also have favourable tax treatment, though whether the long term capital gains taxability kicks in post a holding period of 1 year or 2 years depends on whether the fund is classified as Equity oriented (Aggressive) or Debt-oriented (conservative). If classified as Aggressive, then LTCG @ 12.5% is applicable after a minimum holding period of 1 year and if classified as Conservative, then LCG@12.5% is applicable after a minimum holding period of 2 years.

3. The retiree should commence investments in such mutual funds, several years prior to retirement, so that the schemes work their magic in growing wealth through compounding and withdrawals when SWP commences after retirement are taxed at advantageous rates.

4. The mutual fund scheme option selected should be Growth (to allow compounding of returns including through re-investments of dividends / income generated in the interim) and the plan should be direct plan (to save the relatively higher expense ratios associated with Regular plans).

5. In case of Target maturity debt funds, the underlying should be sovereign securities including State Development Loans.

6. The SWP amount and periodicity should be decided in coordination with a registered financial expert / investment advisor, because it has to be in tandem with the accumulated corpus in the mutual fund portfolio at the time of retirement and it has to be able to meet the increasing cost of living on account of inflation over time.

7. The Equivalent of SWP in mutual fund schemes, for NPS is called SLW or Systematic Lump sum Withdrawal. The advantage in SLW is that the withdrawals would be tax-free and given NPS C / G performance track record, having an allocation to C/G predominantly (say 80%) and only 20% to E, could also provide to be beneficial in meeting income needs which beat inflation and last till age 75 years (Since SLW option under NPS, is available till age 75 years only).

8. Please note that SWP (or its Equivalent SLW in NPS) should be one of the choices exercised by a retiree and which should be planned for many years before retiring as mentioned above. The other choices available and that could be utilised by a retiree for getting regular income are Senior Citizen Savings Scheme, Annuity, long tenor G-Sec, Post Office Monthly income scheme, GOI Floating rate bonds, Bank FD.

Conclusion
To conclude, everyone anticipates the day they can retire and finally say goodbye to the workforce. However, doing so is expensive and takes a lot of effort and proper strategy. Therefore, planning for Retirement becomes essential in this situation, and so does protecting your Retirement Savings from negative changes that may cause inflation. It makes no difference where we are in life. By saving money now, we will have fewer worries in the future, and by making sure that you have built an Inflation-Proof Retirement Plan, you can easily manage your savings and have a healthy Retirement when the time comes. Thus, we hope that this blog helped you get a gist of how you can protect your Retirement Savings from the economic force of Inflation.