SWP for Long Term: Securing My Son's Future with Autism

Good evening Sir ; My queries are regarding SWP for really long term periods appx. 40 years . I am expecting a corpus about 3Cr. in the year 2030 when I will be retiring . My son is having ASD ( Autism ) thus very less scope to earn and manage finance independently in his carrier . So , I am planning to manage my corpus such a manner so that he will survive from this corpus till his 60 years of age . For that , I need to generate sufficient fund for more or less 40 years i.e. till 2070 . I am expecting a corpus of Rs. 3 cr. at the year 2030 , 100 % of which will be contributed by MF . Now , I am thinking to put the entire sum in SWP , in order to generate a regular monthly income because I don't see FD or other regular income schemes are not viable to produce a constant flow during such a long period . That's why , I am seeking your novel advices / guidelines in order to prepare a sustainable roadmap towards my future financial planning . for further information , I am assuming three of us will stay together till 2050 & my son will be alone say another 20 years . Also , I am expecting to withdraw 1.5 L per month from 2030 onwards which is divided into 3 equal proportion ( 50k x 3 ) , assuming there will be an average inflation of 6% throughout the time period ( as per inflation history of India since independence ) of 40 years . Now my questions are : 1. Is SWP the right method to sail through this journey comfortably ? Seek your advice for any better path / combination . 2 . What's the tax implication in SWP ? Kindly elaborate a little . 3 . If possible , kindly suggest the best fund ratio for SWP understanding my facts . I am available to provide any further information regarding this . thanking you in advance ; very best regards ; Suprabhat Jatty

Ans: Your concern for your son's future is commendable. Your goal of generating a steady income stream for 40 years through a Systematic Withdrawal Plan (SWP) is a prudent approach given your circumstances.

Addressing Your Questions
1. Is SWP the Right Method?

SWP is a viable option for generating a regular income from your corpus. It allows you to benefit from potential market growth while providing a steady cash flow.
However, it's essential to consider the following:
Market volatility: The value of your corpus will fluctuate with market conditions. This can impact the sustainability of your withdrawals.
Inflation: You've correctly identified inflation as a significant factor. It's crucial to ensure your withdrawal amount keeps pace with inflation to maintain your purchasing power.
Emergency fund: Having a separate emergency fund is advisable to cover unexpected expenses without dipping into your SWP.

2. Tax Implications of SWP
Debt Fund capital gains: If you redeem units, you'll pay capital gains tax, which is added to your income and taxed at your applicable income tax slab.

Long-term capital gains in equity funds: If you redeem units held for more than a year, you'll pay a long-term capital gains tax of 12.5% on the gains exceeding Rs. 1.25 lakh in a financial year.

3. Best Fund Ratio for SWP

Diversification is key. Considering your long-term horizon and the need for income, a balanced approach is recommended.
A mix of equity and debt funds can help manage risk and return.
The exact ratio will depend on your risk tolerance and the market outlook. A typical starting point could be a 60:40 equity-debt mix, but this can be adjusted based on your financial advisor's recommendations.
Regular rebalancing is crucial to maintain your desired asset allocation.

Ensuring Long-Term Sustainability
Regular Review
Annual Review: Regularly review the performance of your investments and the adequacy of the withdrawal amount.

Adjust Allocations: Adjust the equity-debt ratio if needed to maintain the corpus value.

Diversification
Multiple Funds: Invest in a variety of mutual funds to spread risk and enhance returns.

Rebalancing: Periodically rebalance the portfolio to maintain the desired equity-debt ratio.

Professional financial advice: Given the complexity of your situation, consulting with a financial advisor can provide tailored recommendations.

Final Insights
The SWP strategy is suitable for your long-term financial goals. It provides a stable income while allowing for potential growth. Keep in mind the tax implications and the need to adjust for inflation. A balanced mix of equity and debt funds will help in managing risks and ensuring sustainability.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Sir, I appreciate your proactive approach to managing your post-retirement finances. You have a solid foundation with sufficient savings in the equity market and mutual funds. Now, you are looking for a steady monthly income, which is a prudent move.

Your focus on Systematic Withdrawal Plans (SWP) is wise. SWPs offer regular income while keeping your investments intact, ensuring that you don’t have to liquidate your assets prematurely. This approach can help you manage your retirement expenses smoothly.

Evaluating SWP: A Strategic Approach
Before discussing specific SWP options, it’s important to understand the broader strategy. Your choice of SWP should align with your financial goals, risk tolerance, and market conditions. Let's assess these factors in detail.

Your Financial Goals
Monthly Income: You need a continuous, steady income to cover your living expenses. This income should be inflation-adjusted to maintain your purchasing power over time.

Capital Preservation: While generating income, it's vital to preserve your capital. You want your investments to last throughout your retirement years.

Growth Potential: Though you’re focused on income, growth remains important. A small portion of your portfolio should aim for capital appreciation to counter inflation.

Risk Tolerance
Moderate Risk: At this stage, your risk tolerance should be moderate. You can take some risk for higher returns but must avoid high-risk investments that could erode your capital.

Market Volatility: Given the current market scenario, it's important to select investments that can withstand volatility while still providing a steady income.

Market Conditions
Current Scenario: The market conditions can change rapidly. Therefore, flexibility in your SWP plan is essential. It’s important to choose funds that can adapt to changing market dynamics.
Benefits of Actively Managed Funds
Given your goal of regular income, actively managed funds offer significant advantages over index funds or ETFs. Let’s explore why actively managed funds are more suitable for your needs.

Flexibility and Adaptability
Active Management: Actively managed funds are overseen by professional fund managers. These managers adjust the portfolio based on market conditions, aiming to maximise returns while minimising risk.

Better Downside Protection: During market downturns, actively managed funds can shift to safer assets, protecting your capital better than index funds.

Tailored Strategy
Income Focus: Actively managed funds can focus on generating regular income. They can invest in dividend-paying stocks or interest-bearing bonds, aligning with your need for a continuous income stream.

Customized Risk Management: These funds can be tailored to match your risk tolerance, offering a mix of equity and debt that suits your profile.

Disadvantages of Index Funds and Direct Funds
Let’s also address why index funds or direct mutual funds may not be the best choice for your SWP strategy.

Lack of Flexibility in Index Funds
No Active Management: Index funds simply track a market index and do not offer active management. They cannot adapt to changing market conditions, which can be risky during downturns.

Market-Driven Returns: Your returns are directly tied to market performance. If the market declines, so do your returns, which can affect your SWP income.

Challenges with Direct Funds
Lack of Guidance: Direct funds do not involve the expertise of a Certified Financial Planner (CFP). This means you’re on your own when it comes to selecting and managing your investments.

Inconsistent Performance: Without professional management, the risk of selecting underperforming funds increases. This can impact your overall returns and the sustainability of your SWP.

Choosing the Right SWP: Criteria to Consider
Selecting the right SWP involves more than just picking a scheme. It’s about ensuring that the fund aligns with your financial goals, risk tolerance, and market outlook.

Fund Type and Objective
Balanced Advantage Funds: These funds are designed to balance risk and reward by dynamically adjusting their equity and debt allocations based on market conditions. They offer a good mix of stability and growth potential.

Hybrid Funds: These funds combine equity and debt, providing income through dividends and interest. They are less volatile than pure equity funds and can offer more stable returns for your SWP.

Performance Track Record
Consistency: Look for funds with a consistent performance track record over multiple market cycles. This indicates that the fund management team can navigate different market conditions effectively.

Risk-Adjusted Returns: Focus on funds that offer good risk-adjusted returns. This means they provide higher returns relative to the level of risk they take on.

Expense Ratio and Tax Efficiency
Lower Expense Ratio: Choose funds with a reasonable expense ratio. High expenses can eat into your returns, reducing the effectiveness of your SWP.

Tax Efficiency: Consider the tax implications of your SWP. Long-term capital gains from equity funds are taxed at 10% after Rs 1 lakh. Debt funds offer indexation benefits, making them more tax-efficient for long-term investments.

Setting Up Your SWP: Steps for Implementation
Once you’ve selected the right funds, setting up your SWP involves a few key steps. This ensures that you start receiving your monthly income smoothly.

Determine the Withdrawal Amount
Sustainable Withdrawal: Calculate the withdrawal amount that your portfolio can sustain. With Rs 60 lakhs, a withdrawal rate of 4-5% is generally considered safe. This translates to an SWP of around Rs 20,000 to Rs 25,000 per month initially, adjusting for inflation over time.

Inflation Adjustment: Plan to increase your SWP amount gradually to keep pace with inflation. This ensures that your purchasing power remains intact.

Monitor and Review Regularly
Annual Review: Review your SWP plan annually to ensure it remains aligned with your needs and market conditions. Adjust the withdrawal amount or switch funds if necessary.

Rebalance Portfolio: Rebalance your portfolio periodically to maintain the desired asset allocation. This helps manage risk and optimise returns.

Addressing Common Concerns: A Practical Perspective
It’s natural to have concerns about your SWP strategy. Let’s address some common ones to ensure you feel confident about your plan.

Market Volatility Impact
Short-Term Fluctuations: Market volatility is inevitable, but a well-chosen SWP can withstand short-term fluctuations. Funds with a balanced or hybrid approach provide a cushion during market downturns.

Long-Term Perspective: Keep a long-term perspective. While markets may be volatile in the short term, they generally trend upwards over the long run, supporting the sustainability of your SWP.

Running Out of Money
Sustainable Withdrawal Rate: Sticking to a sustainable withdrawal rate (4-5%) helps ensure that your portfolio lasts throughout your retirement. Avoid withdrawing too much too soon.

Growth Component: Including a growth component in your portfolio helps your capital grow over time, reducing the risk of running out of money.

Final Insights
Sir, setting up an SWP is a smart move for generating a steady monthly income during retirement. It allows you to enjoy the fruits of your investments without liquidating your entire portfolio.

Focus on choosing the right funds, considering actively managed options that align with your goals and risk tolerance. Avoid index funds and direct funds, as they may not offer the flexibility and professional management you need at this stage.

Regularly review and adjust your SWP plan to keep it aligned with your needs and the market conditions. By doing so, you can enjoy a comfortable and worry-free retirement with a reliable income stream.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in