Systematic Withdrawal Plan

A tool for retirement

In March 2024, wrote about a hypothetical case of an NRI Indian investor retiring using Systematic Withdrawal Plan (SWP) in mutual funds. I cherry picked the worst time to invest in last two decades and showed even with such a bad timing if the markets grew then retirement would not be impacted. A couple of friends pointed out that there were few flaws in my write up

• I allocated to a 100% equity fund, no retiree would do it

• I was very conservative in my withdrawal increase rate, tying it to percent of funds rather than actual amount

• I need to factor in 10% inflation which is common in India year on year in my withdrawal rate

So in this post , let’s fix all those assumptions and see outcome. We will

• Keep start date same, December 2007 i.e. peak of market

• Invest lump-sum in December 2007 in a regular balance advantage fund

• Start first withdrawal after 1 year in December 2008 i.e. worst point of markets with ~50% corpus eaten up by by Mr Market

• Withdraw 6% of initial corpus in year 1 (aggressive against 4% used last time)

• Increase our withdrawal rate 10% every year

I chose HDFC Balance Advantage Fund¹ as it has a 30 year track record

The results

Fund Value over Years

The initial INR 1 crore invested in 2007 is INR 1.77 crore in Sep 2024. The fund has experienced two gut wrenching drops, first one during Global Financial Crisis and second one peak to bottom during Covid in 2020 from highs in 2017

Next question

How long would the funds last before they become zero?

8 more years as per image below (ignore dollar symbol, I just used a dollar calculator)

but the assumptions are simple

• Funds continue to earn ~11% every year

• the investor continues to withdraw 10% higher than previous year

So even with extremely aggressive assumptions the funds lasted 25 years.

In practice I dont think funds would ever finish, If someone has good medical coverage and good insurance their expenses tend to go down not up as they age

Comment if you have a question or you want to challenge any assumptions, I respond to every comment.

If anyone is thinking about SWP share and help spread about our small publication

Happy Investing

1. Data used