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