How to Create Regular Retirement With SWPs
Author: Sanjay Sharma
Get Regular Retirement Income With SWPs
You have saved diligently for your retirement,
especially to have regular income in retirement. But you still need to ensure
that your retirement savings get channelised into regular retirement income. To
do this smartly, you need to understand the major categories of retirement
expenses.
Lump sum, periodic and regular expenses In case of retirement, the expenses can be broadly categorised lump
sum, periodic and regular expenses. Your regular expenses such as those for
monthly groceries and mobile services bills continue in our retirement. You
need regular income flow to meet these expenses.
You also need to meet periodic expenses such as
reasonably significant expenses that happen annually or every 2-3 years. For
instance, home maintenance expenses. You also need to be prepared for lump sum
expenses such as those related to major social events like marriages in the
family.
How systematic withdrawal plans (SWP) help When planning for regular retirement expenses, you need to plan for a
regular income. This is where systematic mutual funds (SWPs) offered by mutual
funds, can be of great help. The SWP facility sells units of any mutual fund
scheme regularly to generate regular income to meet regular expenses in
retirement.
Why you need a debt fund SWP While you can have a SWP from an equity fund or a debt fund scheme, in
this case, it is a debt fund SWP that you need. The reason for this is that you
would like a high degree of stability for the regular retirement income required.
The likelihood of this happening is much higher with lower risk, debt funds.
For SWPs, you can also tap into other sources of income.
How to use SWP Approximately 3 years before you need the money
i.e. your retirement, gradually move your retirement savings from high growth investments
like equities and equity funds to debt funds. Doing this brings you two
advantages.
First, this will secure the gains made in long
term growth investments like equities and equity funds. Second, planning can be
done to get the debt fund SWP facility kick in from the time you need the
regular retirement income.
Tax planning is the key To get the most out
of debt fund SWPs, one needs to ensure that the when the money is needed, debt
fund units of more than three years, are sold to create the regular
income. This is because for debt fund
units, more than 3 years old, long term capital gains tax becomes applicable.
This means that the inflation indexation benefits are available where the cost
of acquiring the debt fund units get enhanced factoring in the impact of
inflation during the period of investment. This, in effect, reduces the taxable
capital gains.
Also, you pay 20% long term capital gains tax.
This much lower than tax paid by those in the highest 30% tax slab for fully
taxable income like that from interest. Of course, capital gains from units
that are less than three years old get taxed according to the income tax slab.
Clearly, SWPs can become a reasonably reliable
and tax efficient source of regular retirement income. They can effectively supplement
other popular sources of regular retirement income such as Senior Citizens
Savings Scheme (SCSS) and Post Office Monthly Income Scheme (POMIS).
