‘Not a set-it-and-forget-it plan’: A guide to Systematic Withdrawal Plans that are gaining popularity among retirees

Take, for instance, the case of a recently retired banker from a cooperative bank. After decades of service, he walked away with a retirement corpus of ₹60 lakh but no pension. Like many others in similar roles, he found himself sitting on a large sum of money but with little idea of how to ensure it lasts through his retirement years. For such individuals, discovering SWPs can feel like a financial lifeline, offering the comfort of regular income, much like a salary.

However, while SWPs offer several advantages, they are not without pitfalls. The returns aren’t guaranteed, and during market downturns, there’s a real risk of eroding the principal faster than anticipated. This makes financial awareness and a well-thought-out withdrawal strategy essential.

Understanding how SWPs work and where they might fall short can be the key difference between financial freedom and retirement stress.

“SWPs allow investors to withdraw funds from their portfolio at periodic intervals to meet scheduled liquidity needs,” says Rajesh Cheruvu, chief investment officer, LGT Wealth India. “This helps avoid lump sum withdrawals, maintains asset allocation, and allows longer market participation. Investors can also switch asset classes when market conditions are favourable and draw income from tax-efficient instruments for superior returns.”

Let’s break that down with an example: Imagine you invest ₹1 crore in a diversified mutual fund portfolio that grows at a conservative 10% annually. If you withdraw ₹50,000 a month (₹6 lakh annually), that’s a 6% withdrawal rate. Even with regular withdrawals, after 20 years, your corpus could still be worth around ₹3 crore. But what if you extend that to 30 years? “At the same rate of return and withdrawal, the corpus could grow to over ₹7 crore,” says Nehal Mota, Co-Founder & CEO, Finnovate. “That’s the power of compounding and disciplined withdrawals; it provides steady income without eroding wealth.”

While SWPs can provide consistent income and long-term growth, they’re not immune to market risks. If the markets deliver negative or low returns in the initial years, especially early into retirement, your corpus could shrink faster than expected. This is known as sequence of returns risk, where poor returns early on, combined with ongoing withdrawals, can severely dent the portfolio and reduce its ability to recover later.

For instance, if your mutual fund portfolio suffers a 10% loss in the first year and you also withdraw 5%, you have effectively reduced your corpus by 15%. If such a pattern continues, even temporarily, the power of compounding may be significantly weakened.

What should retirees keep in mind?

•  Keep 1–2 years of withdrawals in liquid or low-risk funds, so you are not forced to redeem during market downturns.

• Review and rebalance your portfolio regularly to maintain the right asset allocation.

• Consider pausing or reducing withdrawals temporarily during major corrections.

• Stick to a safe withdrawal rate: “To achieve the highest possible returns and maintain the corpus, withdrawing no more than 4–5% of the original corpus every year is advisable. This counteracts market volatility while preventing the portfolio from draining out too early,” said Mota.

• Stay flexible: Your withdrawal amount should evolve with your life. Use a bucket strategy—dividing your investments into short, medium, and long-term needs—to manage cash flow smartly.

• Mind the tax advantage: Unlike fixed deposits or pension payouts, SWPs are taxed only when you withdraw, and even then, only on capital gains, which are more favourably taxed than interest income.

• Work with an advisor: A financial advisor can help you optimise withdrawals, adjust risk based on age, and ensure your strategy aligns with your legacy goals.

Is SWP ideal for retirement?

SWPs work best when they are part of a diversified, actively monitored retirement strategy, not a set-it-and-forget-it plan.

They offer the dual benefit of monthly income and long-term growth. SWPs give retirees control over their cash flows without locking money into rigid instruments. You are not just living off your savings; you are letting your money work for you well into retirement. And with proper planning, SWPs can even help pass on a substantial legacy to the next generation.