What do you mean by Systematic Drawdown Plan (SWP) Because we often tend to associate this particular benefit or instrument with retirees and post-retirement benefits. But that doesn’t mean that other people who have other types of non-retirement goals, can’t add this feature in their portfolio if they want to.
As the name suggests, SWP comes from a group that keeps pulling something out of it on a systematic basis. The reason why it is so relevant to retired seniors is that just like the Systematic Investment Plan (SIP) averages a cost of rupees, the Regular Withdrawal Plan does the same for withdrawals.
SWP is something he doesn’t focus on much. For retirement, the whole focus has been on the buildup phase during the time you’re creating that pool. There is very little study on when you need the money, your pension and at that time, the variables assume how much you have, what you will earn, how much you will live, and how much you can withdraw so that the pool lasts your whole life.
Now that’s four variables and each is a separate issue and the only product that currently caters to this is the life insurance annuity product, which gives a fixed return for the duration of your stay. It is now clear that they are taking all the risks. They are risking how long you will live and the interest rates they will earn and this amount is small. This is a market that is not very developed yet.
Not much research has been done on the market where a citizen himself creates a pool and pays a pension for himself with a systematic withdrawal. One could have some references to the 4% rule which is basically a US based rule, which has absolutely nothing to do with India but is a very powerful way in which you can support yourself – because people are now living 30 to 35 years post retirement. When you live for a long time, you will need money and for a long time, you can’t afford to put your whole amount in a fixed income because that won’t beat inflation and you have to beat inflation after taxes.
The only product that can do that for you is stocks and how to include that and how to take advantage of the systemic self-drawing strategy is what we have to discuss today.
Now you are saying that the premium market is really not well developed. How can SWP be used over the years so that one can have regular income after retirement? How do we get around this particular strategy while factoring in taxes and taking into account regular income requirements?
For the first part, a lot of work has been done. The accumulation stage is well covered. Upon reaching the stage of the regular withdrawal plan, there is a self-balancing equilibrium fund. Since 1979, Sensex data has been available. We also captured fixed income data from 1979 to 2005 and extrapolated it to a liquid fund.
So, we effectively have data for both fixed income and stock markets going back from 1979 through 2022. Now let’s say someone has a 1 crore pool, how much can they withdraw if they need to withdraw for 30 years so that the pool doesn’t work out? How do you define that? Based on past performance, we have determined that if from your pool, 80% is placed in BSE Sensex and 20% in a liquid fund, the past data shows that if you started withdrawing from 1 crore in Rs. 27,300, this money should continue to increase due to inflation. This is the issue of premiums.
In the annuity market, the amount remains fixed and so in the beginning, it may be a decent amount but as the years go by, the value of that money decreases. In this, we assume that the drawdown ratio will rise by 6% every year and this is also after taking into account the capital gains tax of 10%. So, if you withdraw Rs 27,300 in the first year, Rs 29,000 in the second year, Rs 30,700 in the third year, etc., for 30 years, you will continue to increase it by 6% every year so that it lasts 1 crore for the whole 30 years. years.
Now if you’re going to take a little risk and say I’m fine if it kind of runs out, that number, instead of starting at Rs 27,300, jumps to Rs 47,100. That money you can withdraw and please remember that it is also inflation indexed. So Rs 47,000 will become Rs 50,000 in the second year, it will become Rs 53,000 in the third year and so on. This is a very powerful strategy for an inflation index pension because a self-balancing fund is a tax-friendly measure because the balancing takes place inside the fund and when you withdraw, only part of the gains is taxed. Therefore, it is tax friendly. The disclosure is that this business is based on a lot of assumptions and obviously the biggest disclosure required is that past performance is not always repeated in the future.
When we withdraw money, the group is invested in what kind of fund or in what kind of investment vehicle? Doesn’t it get worse anymore?
Correct. What the combination is supposed to be is 80% in a Sensex index fund and 20% in a liquid fund but in a fund where it is constantly being held at that level at 80 and 20. So, assuming you start with Rs 1 crore and put Rs 80 lakh in BSE Sensex and 20,000 rupees in a liquid fund, but in a money box.
So if Sensex goes up, they will have to sell Sensex and buy Liquid. If Sensex goes down, they will have to sell Liquid and buy Sensex. All these assumptions in this work were taken on previous data and subsequently these pull-out assumptions were made. These calculations are based on Sensex data and you are supposed to invest 80% in a Sensex linked fund and 20% in a liquid fund. They continue to automatically rebalance each month.
We’re here thinking post-retirement, but for anyone who wants to retire early at 40 or 45, how can SWP be useful?
The SWP may not really help people who want to retire early because their income will be spotty. They haven’t really retired in the sense that they’re doing what they want to do. They don’t work for the money, which is my assumption, and in this case, they aren’t sure how much they want to withdraw each month.
It will depend on whether there is a shortage of their income. The normal idea is that the accumulated group can continue to grow and its current expenses will be covered by the current income. Now they don’t need to stack more materials. This is the general understanding. They do not need to opt out of the blog except in an emergency. If the current income is not achieved at all or is not even equal to the living expenses, then there should be case-by-case accounts. I don’t think systematic withdrawal will help these people.