We examine the results of running a long-term SWP in index funds for retirement.

📚 Table of Contents

☰

• Defining SIP, SWP and STP
• Sample portfolios - 4% SWR / 25x expenses
  • Example: success case
  • Example: failure case
• Results
• Caveats regarding the analysis

This article is a part of our detailed article series on Safe Withdrawal Rates. Ensure you have read the other parts here: Show/Hide

Defining SIP, SWP and STP

All of these are standing instructions that get executed as per a schedule you specify:

• Systematic Investment Plan (SIP): Money from a bank account is invested into a mutual fund, typically once a month
• Systematic Transfer Plan (STP): Units from a mutual fund are redeemed to invest in another mutual fund of the same AMC
• Systematic Withdrawal Plan (SWP): This is the reverse of the SIP. You sell the units from a mutual fund to send money to a bank account

In this article, we will see if you can have an SWP during retirement to fund in-retirement expenses. Here the success criterion is:

• being able to keep up with inflation. We will assume 7% inflation during retirement. At this rate, costs double in around ten years.
• not to run out of money before dying. We will assume 30 years in retirement

There should be multiple other income sources in a retirement portfolio like a pension plan, SCSS, Post Office MIS, RBI bonds or bank FD.

In this article we will address a common question from investors:

Can I run a SWP from an equity mutual fund in retirement?

You can use this step-up SWP calculator to see how such a fixed-return SWP works in theory:

We will add two conditions to our questions “_Can I run a SWP from an equity mutual fund in retirement?:

• the fund chosen is an index fund. It is difficult to do this analysis with an active mutual fund since there are so many funds each behaving unpredictably year-on-year
• the equity fund is the only asset in the retirement portfolio

Due to the lack of data for the Indian market, we use Monte Carlo simulation using Nifty 50 Total returns index data since 1999 to model 1,000 retirement paths for SWR ranging from 1% to 5% at 0.5% intervals.

Sample portfolios - 4% SWR / 25x expenses

We will assume that the first year’s withdrawal to be a value between 1% and 5%. The withdrawal amount will be increased by inflation every year. As a practical example, we will take

• starting portfolio of one crore
• ₹2.5 lakhs expense in year one; 2.5 * 1.07 = ₹2.675 lakhs expense in year two etc.
• since SWP is a standing instruction, we will edit the withdrawal amount in the mutual fund portal once a year to adjust for inflation

Start	₹ 1,00,00,000
Withdrawals ⬇️	–
Year 1	₹ 2,50,000
Year 2	₹ 2,67,500
Year 3	₹ 2,86,225
Year 4	₹ 3,06,261
Year 5	₹ 3,27,699

We define “success” as ending with a non-zero portfolio, i.e. not running out of money, after a 30-year retirement with an SWR between 1% and 5%. As per the definition of SWR, the starting portfolio value is 1/SWR. So in terms of the first year’s expenses, a 4% SWR is 1/4% = 25x expenses.

Example: success case

This case leaves behind a ₹4 crores corpus for the heirs.

Example: failure case

This case runs out of money around halfway into retirement.

Results

We ran 1,000 such simulations for each of the SWRs (1-5%) and calculated the number of cases where there is a non-zero portfolio value after 30 years with a starting portfolio value of one crore.

Here the “Nearly failed” case is equal to an ending value less than or equal to one-fourth of the starting value. Since the starting portfolio is ₹1 crore, any ending value less than ₹25 lakhs is a near-miss. At 7% inflation, this ₹25 lakhs has lost its purchasing power to just ₹3.2 lakhs in 30 years and will, depending on the SWR, pay for only a few months to a year of retirement expense in the 31st year.

The conclusion is quite clear:

• the higher the starting corpus i.e. lower the SWR, the higher the chance of completing retirement
• Below 3.5% SWR, the chance of finishing retirement exceeds 80% or 4 times out of 5
• At 5% SWR or with only 20x expenses as retirement corpus, there 3 times out of 10 chances of failure by running out of money

Caveats regarding the analysis

• we have assumed that the next 30 years behave like the previous 30. Any changes in how the relative risk and returns of the stock market will change the result considerably
• the Monte Carlo simulation assumes that the returns follow a Normal distribution where falls are just as likely as rises in the market. In the real stock market, falls are more frequent or further than rises

In a future article, we will cover the following two cases:

• combining an equity SWP with two buckets: cash and income
• equity SWP with a pension plan - for example, an NPS corpus at 60 where you need to buy an annuity with 40% of the amount and have an option of investing the remaining 60% in an equity fund. We have completed that analysis and the results are not promising for NPS subscribers.