Systematic Withdrawal Plans (SWPs) are often associated with retirement planning. SWPs allow you to withdraw a fixed amount from your mutual fund investments at regular intervals and can help create a regular income stream. This makes them popular amongst retirees.
However, SWPs can be useful for other milestones too. They can be used to plan for significant life events like your own higher education or that of your child, a big purchase, a career break, and many other events. In this article, we will break down how an SWP calculator can help you plan for these important goals and factors to keep in mind when considering an SWP.
What is an SWP calculator?
An SWP allows investors to withdraw a fixed amount of money at regular intervals (weekly, monthly, quarterly, etc) from their investments. Instead of redeeming all your investments at once, you can receive a fixed amount regularly while letting the balance funds continue to potentially grow.
An SWP calculator is a tool that helps you plan your withdrawal strategy. The calculator factors in the total investment value, withdrawal amount, expected growth on the balance investments, and the period over which you want to make withdrawals. It then helps you plan your withdrawals in such a way that you can potentially meet your requirements without depleting your corpus too soon.
What goals can you use an SWP for?
Financing higher education or taking a mid-career break requires significant resources. Often, people dip into their savings or take loans to cover these expenses. However, an SWP can offer a more planned approach to financing these goals. With an SWP, you can tap into a portion of your investments to cover such costs while the rest of your investment continues to get market exposure and access growth potential.
Thus, an SWP can help you balance current financial needs with long-term wealth creation potential. Instead of pulling out all your investments at once, you can tap into a portion of them while the balance amount can continue to potentially grow.
SWPs for education
Let’s say you’re planning for your child’s higher education. You’ve built up some savings and invested in mutual funds, but you’re not sure how to manage withdrawals when the time comes to pay tuition fees, accommodation, and other related expenses. This is where an SWP calculator can be beneficial. Here’s how you can use it:
1. Estimate the total cost: Start by estimating how much money you will need for your child’s education. Consider tuition, living expenses, books, and other related costs.
2. Set your investment goal: Input the total amount you have invested in your mutual funds or any other investment.
3. Determine the withdrawal period: You’ll need to figure out how long you’ll be withdrawing the money. For example, if this is a four-year course, set the withdrawal period to four years.
4. Use the SWP calculator: The calculator will help you figure out how much you can potentially withdraw each month or each year. It ensures that your withdrawals are spaced out evenly, so you’re not withdrawing too much or too little at once.
With an SWP, you get regular payments that you can use to pay for your child’s education while the rest of your investment continues to grow in the background. You can also similarly use an SWP to generate an income stream during a mid-career break or to generate a supplementary income stream when you are trying to set up your own business, among other scenarios. Moreover, you can also use it to finance EMIs for a purchase.
Factors to consider before starting SWP
As tempting as it may be to generate income from your investments even before retirement, it is important to make sure that this aligns with your larger financial goals. The longer you stay invested, the more you can potentially benefit from the power of compounding – which can help your investments grow exponentially over a period of time by generating returns on returns. This is especially true when you invest in equity-oriented schemes, such as large cap funds, large and mid cap funds, flexi cap funds, etc.
So, an SWP should not be used solely for its convenience; rather, it should be a well-considered part of your financial strategy.
For this, you must also identify how long you should stay invested before you initiate your withdrawals so that you don’t significantly affect the long-term growth potential of your investment. Withdrawing too much too soon could deplete your funds faster than anticipated, leaving you with less for future needs like retirement or other big goals.
Therefore, it’s essential to ensure that your SWP fits within your broader financial plan so that you can supplement your income when needed, without compromising on your overall wealth-building strategy.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
