Conservative 4%, aggressive 6%: How much you can safely withdraw from SWPs; expert explains

A Systematic Withdrawal Plan (SWP) is increasingly emerging as a preferred option for retirees seeking a steady income stream from their investments. Unlike traditional sources such as pensions or fixed deposits, SWPs allow investors to withdraw fixed amounts at regular intervals from mutual fund investments, offering both predictability and flexibility. This approach is particularly useful for retirees from cooperative banks and certain government institutions who do not receive pensions.

In a recent podcast, Dhirendra Kumar, CEO of Value Research, explained how investors can use SWPs effectively without depleting their capital. He emphasized the importance of balancing income needs with long-term portfolio growth and inflation protection.

How SWPs work

Kumar described SWP as the opposite of a Systematic Investment Plan (SIP). While SIPs help investors build wealth over time by investing regularly, SWPs allow them to draw a predictable monthly income. For instance, if someone invests ₹10 lakh in a fund, they can set up a standing instruction to withdraw a fixed amount each month.

The key lies in determining a sustainable withdrawal rate. Kumar suggested a cautious approach of 4% annually, a middle ground at 5%, and an upper limit of 6%. “A conservative withdrawal ensures capital preservation and allows growth over time,” he said. Over-withdrawing, he warned, risks eroding capital, leaving retirees vulnerable to inflation and unexpected expenses.

Structuring the portfolio

Kumar outlined different portfolio approaches depending on risk appetite.

For higher withdrawals (around 6%), he recommended aggressive hybrid funds with roughly 75% equity exposure.

For moderate withdrawals (5%), balanced advantage funds could be suitable.

For very cautious investors aiming for 4%, conservative hybrid funds provide more stability.

For larger portfolios — Rs 50 lakh or above—he advised a layered allocation strategy:

Keep two years of expenses in liquid or short-term debt funds for safety.

Allocate the next 3–5 years’ needs into conservative hybrids or balanced advantage funds.

Invest long-term surplus (needed after 5+ years) into equity-oriented funds, such as flexi-cap or aggressive hybrid schemes.

This structure, Kumar said, shields retirees from market volatility in the short term while allowing long-term capital to grow.

Managing expectations

Kumar cautioned against assuming consistently high returns. While markets may occasionally deliver 20% annual gains, downturns are inevitable. “Have conservative expectations,” he advised. “Don’t plan withdrawals as if markets will always do well.” He stressed reviewing withdrawal amounts every year or two, adjusting for changes in capital and inflation.

Tax considerations

Withdrawals under SWPs are treated as capital gains, unlike fixed deposits, where interest is taxed annually. In equity funds, gains are taxed at short-term or long-term rates depending on holding periods. Debt and hybrid fund withdrawals are taxed as income. Kumar argued that despite taxation, SWPs remain superior to dividend (IDCW) options, which are irregular and dependent on realized profits. “SWPs provide predictability and control,” he noted.

He also highlighted that conservative hybrid funds may outperform fixed deposits over time, while offering the benefit of tax deferral—gains are taxed only when withdrawn.

A flexible tool

The SWP’s appeal lies in its flexibility, simplicity, and favourable tax treatment compared to options like fixed deposits. Rather than locking funds away, retirees can manage cash flows in a manner similar to a regular salary, allowing them to maintain financial independence throughout retirement years.

Ultimately, SWPs give retirees control, flexibility, and the ability to tailor withdrawals to their lifestyle needs. With prudent planning, careful fund selection, and realistic expectations, Kumar said, SWPs can help investors secure stable income without exhausting their nest egg.