SWP with tax calculator
How long will my money last? Know the years over which you can withdraw, considering tax impact
Do you wish to set up a regular income stream by withdrawing systematically from your investment corpus or by putting it in income-generating investments? Then this calculator will tell you how long your corpus will last, taking into account taxes, returns, your expenses and inflation.
Note: Withdrawals assumed at the beginning of the year. Returns added at the end of the year.
Notes to calculator
- The calculator assumes an annual withdrawal, at the beginning of the year. Returns and taxes are considered at the end of the year.
- The calculator assumes the entire withdrawal (i.e., income needed to meet expenses) is taxed at the chosen rate. Actual taxes may vary based on your investment – SWPs from debt funds, for example, will suffer taxes on the gain component alone while interest income will be fully subject to tax.
- The calculator should be considered only as a guide or estimate to understand how long your investments can help generate income. The actual number of years for which your corpus will last will be determined by the actual withdrawal, taxes, and returns.
- The results of the calculator are indicative in nature and not advisory. It cannot be considered to be financial planning or a cash-flow analysis.
- To get readymade portfolios for income generation, check out Prime Portfolios.
How long will my money last?
You’ve worked hard, diligently put money away, invested carefully and built up that corpus you were targeting. The only thing left to do is put your feet up and enjoy all that you had planned to with the nest egg. But have you checked how much time your funds will see you through? In other words – how long will my money last? Here are the main factors that could influence how far into the future your money will take you.
- The corpus that you are starting with (if you are not yet at retirement, our Retirement Calculator will help you determine how big a corpus you will need)
- The returns your investments are earning: This would depend on where your corpus is invested. Below, we will tell you what we think the best ways to invest this corpus are.
- Withdrawal rate
- Inflation: This is one of the biggest threats to your purchasing power, more so in recent times. The struggle to generate inflation beating returns at the same time not take on more risk than you are comfortable with can be real.
- The tax impact on your cash flows as incomes such as interest and annuity income are taxed.
- Greater life expectancy
- How your expenses and outflows actually take shape especially unforeseen ones
Where should the corpus be invested?
Where you should invest the corpus depends on your requirements. For you to be able to make regular and steady withdrawals, your portfolio should be low on volatility. Therefore, the following will be the key points for you to remember:
- You should eliminate the risk of big losses or prolonged underperformance. This means the you need to keep equity and equity-oriented funds within reason – just enough to offer some growth to improve ability to beat inflation and make your money last longer. This article on if you can hold equity in your retirement corpus will explain more.
- The bulk of your portfolio should be in safer avenues, such as low-risk interest-bearing instruments such as fixed deposits and government schemes, apart from debt funds.
- You should also stay away from credit risk funds and any other debt fund that holds low-credit papers.
- You cannot also to have big return fluctuations which could result in you redeeming on losses or your investment not growing as expected.
Given the above, the following products can find a place in your corpus:
- Senior Citizen Savings Scheme – a Government-backed savings scheme that provides safety and bank FD beating returns. The scheme comes with a 5-year lock-in and from FY 24 onwards you can deposit up to Rs. 30 lakh in this scheme.
- RBI Floating rate savings bond (2020) – This too scores high on safety and provides better than bank FD returns. Returns are linked to the NSC and are pegged at 35 basis points above it. Rates are reset every 6 months and interest is paid out half yearly with no option to compound. This has a lock in of 7 years with some flexibility on premature withdrawal for senior citizens.
- Fixed deposits – FDs bring liquidity to your portfolio. Spread your investments across 2 or more deposit options. Take a look at Prime Deposits, where we have curated a list of deposits for various tenures and purposes.
- Debt funds – stick to low volatile categories that earn returns through accruals. The following may be best suited.
- Liquid funds and ultra-short/low duration/ money market funds: The liquid category is one that offers the steadiest returns, especially in short-term periods of 1 year and lower and are low risk as well.
- Ultra short and similar categories can generate losses in 1/3 month timeframes and therefore better suited for withdrawal via SWP after say, 6 months to 1 year of holding. But as some funds in this category carry credit risk, check to make sure that you’re not inadvertently taking on risk.
- For other accrual categories such opt for categories such as short duration, banking & PSU debt, or corporate bond. These funds can pep up your SWP portfolio returns. But start withdrawing only after completing 2-3 years of holding as these funds need this period for optimum returns. Ensure that you’re not taking credit risk here, either.
- Gilt funds are also volatile given that gilt prices fluctuate based on interest rates. However, if you do want to hold gilt funds because of their low credit risk, you will have to allow at least 5-7 years before you can begin withdrawing from them.
- Dynamic bond funds are best avoided.
To know how to mix these different options, you can take a look at the retirement portfolios in Prime Portfolios where we have ready-made portfolios for a variety of situations and purposes that you can easily replicate. If your worry is over how long will my money last without high returns, invest some of your corpus in a few moderate-risk equity or hybrid funds. Check Prime Funds.
How long will my money last
Withdrawal rate is basically how much you withdraw per annum from your corpus. This is basically how much you can safely withdraw per annum without running out of money and is the key to answer how long will my money last. If this is
- Too high, you could be burning up your corpus faster than you had planned to and end not being able to meet your requirements.
- Too low, and you will probably find that your income is inadequate to meet your requirements at present.
This is why you will need to arrive at a ‘safe withdrawal rate’.
How to arrive at a safe withdrawal rate?
You may have come across rules of thumb such as the ‘4% rule’ which says that in order to make your corpus last for 30 years, you withdraw 4% or less in the first year and thereafter, use this as the base and adjust for inflation alone. This was formulated by a financial advisor – Willam Bengen – in 1994. However, the 4% rule, like other rules of thumb, make several assumptions including what your asset allocation could be to inflation. Sticking with such rules of thumb could have several drawbacks from not being applicable to the Indian context, not being applicable to the financial climate at present and not being relevant to your portfolio and your situation.
A better way to approach the safe withdrawal rate and improve how long will my money last would be:
- It should be marginally LESS THAN the returns that your investments are earning.
- This would ensure that you are not eating into the capital or depleting it sooner than you should.
- The returns earned get a chance to compound.
Based on what we at PrimeInvestor believe a typical retiree’s portfolio should be, a safe withdrawal rate could be between 6% and 7% in the beginning
- You can withdraw lesser than this but much more than this would not be desirable.
- Thereafter one can make adjustments for inflation
While the SCSS (and tax saving FD if you opt for one) may get you tax deductions, don’t let deductibility drive your choice of investments. If you are wondering which tax regime to opt for, check ‘ Old vs New Tax regime: Tax Planning for 2023-24’ for the main considerations.
First go for investments that strike a balance between low risk and returns as it keeps your cash flows safe. Options such as the SCSS and various government schemes, plus bank fixed deposits are eminently suitable here. If your corpus is smaller, you will automatically fall in the lower tax brackets which will significantly reduce tax outgo.
Then add other investments. Debt funds that can offer compounding benefits and slightly better returns. In debt funds, Opt for the SWP route to make withdrawals. This also lets you control when and how much you withdraw. Do not opt for the IDCW option as funds are not obligated to pay dividends and payout will vary. SWP withdrawals are taxed as capital gains – that is, you pay tax only on the gain component of the amount you are withdrawing and not on the entire amount. To this extent, it can mean deferment of tax paid compared to options such as fixed deposits where the entire interest income is taxed. Capital gain on debt funds will be taxed at your slab rate.
High-returning FDs from smaller banks, NBFCs and small finance banks are also another option. But be aware of the higher risks here. Interest income will be taxed at your slab rate. If your corpus is large enough, you can add moderate risk equity and hybrid funds that can offer better returns and more efficient taxation.
All these will help answer to the question how long will my money last, and keep your retirement cash flows comfortable.