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

Ans: Yes, SWP can be used for regular income, the investment to be made in 4 funds of Rs 1 lakh each.

• HDFC short Term Fund
• Aditya Birla Sun life Corporate Bond Fund
• Edelweiss Balanced Advantage Fund
• ICICI Pru Balanced Advantage Fund

The withdrawal must be under 7% of the corpus for corpus to be available for 20 years and also grow on the initial corpus.

Ans: It's great to see that you've already started planning for your retirement and have a diversified investment portfolio. You're taking the right steps towards securing your financial future.

Given your situation, it's essential to ensure that your investments align with your retirement income needs. SWP (Systematic Withdrawal Plan) can indeed be a useful tool to generate a regular income from your mutual fund investments.

Balanced advantage funds and debt funds both have their merits. Balanced advantage funds dynamically manage their equity exposure based on market conditions, offering potential for growth while managing risk. Debt funds, on the other hand, provide stability and regular income with lower risk.

Your plan to accumulate an additional 50 lakhs in MF over the next three years is commendable. It adds to your retirement corpus and potentially increases your income-generating capacity.

To meet your monthly expenditure of Rs. 65,000 during retirement, you'll need to generate a monthly payout of Rs. 75,000, considering inflation and unforeseen expenses.

Regarding taxation, withdrawals from debt funds attract taxation based on the holding period and are subject to indexation benefits. As for balanced advantage funds, equity taxation rules apply if the holding period exceeds one year. It's advisable to consult with a tax advisor for personalized guidance.

Exit loads might apply when switching to SWP, depending on the mutual fund's terms and conditions. Ensure you're aware of any applicable charges before making the switch.

Your investment strategy should focus on a balanced approach, considering your risk tolerance, time horizon, and financial goals. Diversification across asset classes and regular reviews of your portfolio are crucial for long-term success.

Overall, your plan seems well thought out, but it's essential to review and adjust it periodically to adapt to changing market conditions and personal circumstances.

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

Ans: Harikrishnan. I appreciate your attention to detail and your valid insights on your corpus sustainability. You’ve outlined a practical viewpoint, and I’ll clarify the reasoning behind my previous assessment and address the key aspects you’ve highlighted.

Corpus Longevity and SWP Analysis
Firstly, you’re absolutely correct in noting that even after accounting for major expenses, such as Rs 30 lakhs for your son’s marriage and market fluctuations, your remaining corpus of approximately Rs 1.4 crore is substantial. You’ve also correctly identified that compounding growth can help cover future inflation to a significant extent. Let’s break down the factors that contribute to sustainable withdrawals.

1. SWP for Minimal Lifestyle Disruption
The current SWP of Rs 3.6 lakhs annually is conservative, as you noted. Based on an Rs 1.4 crore corpus, this SWP rate is just over 2.5% per annum.

Given that a balanced mutual fund portfolio can reasonably achieve an annual return of 8-10% over the long term, this withdrawal rate would generally be sustainable and even allow for periodic adjustments.

Your plan is indeed realistic: this SWP rate should comfortably support you for 25-30 years, assuming market performance aligns with historical averages.

2. Compounding Growth vs. Inflation Impact
While your corpus is likely to grow through compounding, inflation will increase living expenses, especially over a 25-30 year horizon.

Inflation Rate Impact: With inflation potentially averaging 5-6% annually, your expenses may double or more in the next 20 years.

Balancing SWP and Corpus Growth: By starting with a conservative SWP rate, you allow more of your corpus to grow during the early years, creating a cushion for potential increases in withdrawals as expenses rise over time.

3. Adjusting the SWP Gradually
Reducing or adjusting your SWP isn’t mandatory at this stage but is a potential strategy to keep as a contingency. If you’re comfortable with the current withdrawal rate and your portfolio growth continues positively, there’s no immediate need to reduce the SWP.

Emergency Fund Consideration
Setting aside a portion of your corpus in a liquid fund for emergency needs is also a wise approach, as you mentioned. This reserve can cover any unexpected expenses without disrupting your SWP withdrawals.

Recommendation: Consider earmarking a portion (such as 6-12 months of expenses) in a highly liquid, low-risk instrument. This step not only provides financial flexibility but also shields your main corpus from frequent withdrawals due to emergencies.
Final Insights
You’ve clearly thought through the sustainability of your corpus and SWP, and your assumptions are practical and reasonable. As long as your portfolio maintains a balanced asset allocation, your current withdrawal rate should support your lifestyle and provide room for future inflationary adjustments.

Your understanding of using compounding growth to counter inflation is sound, and your strategy of relying on a conservative SWP aligned with portfolio growth should help meet your retirement goals with minimal disruption.

Thank you for allowing me to clarify these points, Harikrishnan. Your plan is well-thought-out, and with continued monitoring, you’re on track for a secure retirement.

Best Regards,
K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment