Systematic Withdrawal Plan
Systematic Withdrawal Plan is a type of investment plan where the investor gets the freedom of withdrawing a certain amount of money every month or every quarter. For this to happen, the investor first needs to invest a certain amount of money. Such investment plans are commonly found in world of Mutual Funds. One of the primary benefits of this type of investment plan is a regular income flow.
Since systematic investment plans offer a regular income flow, they are perfect for those who are looking for pension earnings after retirement. However, just anyone of appropriate age can invest in such mutual funds. A regular income flow allows to cover the regular monthly expenses.
The Primary Benefit
One of the primary benefits of systematic withdrawal plans is that TDS or tax deduction at source is not present. However, there is a catch. Though TDS is not deducted, the amount withdrawn under this plan will be subject to capital gains tax.
Types of Systematic Withdrawal Plan
There are two types of systematic withdrawal plans:
- One variant allows fixed withdrawal at predetermined intervals. This means that the investor may decide to withdraw, say INR X every month from a total investment made of say, INR Y. Putting it in numerical value, say a person invested INR 10,00,000 (10 Lakhs) and decides to withdraw INR 10,000 every month.
- The other variant is of appreciation withdrawal at predetermined intervals. In this format of systematic withdrawal plan, withdrawal is allowed only on the total appreciation value of the actual fund. This means that if a person invested INR 10 Lakhs and enjoys 9% annual growth (which stands to INR 90,000), withdrawals are allowed only on INR 90,000, keeping intact the actual invested capital.
Problem with fixed withdrawal: Fixed withdrawal has a problem that the actual investment pool will quickly run out. Assuming that INR 10,00,000 is invested and annual return of 9% is guaranteed, the total annual return will be INR 90,000. If fixed withdrawal of INR 10,000 is set for every month, the total annual withdrawal will be INR 1,20,000. This means that INR 30,000 will be taken out from the actual investment capital, leaving only INR 9,70,000 of capital for investment in next financial year. So, with less capital to invest, there will be less appreciation next year but the withdrawal amount will remain same at INR 1,20,000. This means that the capital will effectively keep decreasing and eventually run down to zero.
Problem with appreciation withdrawal: The major problem here is that withdrawals are allowed only on the appreciation value of the actual capital. Again, different funds have different rules. Some mutual funds will allow up to 90% of total appreciation value to be withdrawn and some will allow even less. On the other hand, there will be a minimum withdrawal amount per month. If in a particular month appreciation amount falls below that minimum allowed withdrawal per month, there are no payout. The appreciated value for that month will then be carried forward to the next month. So, ideally in case of appreciation withdrawal, it is best to opt for quarterly withdrawals or half yearly or yearly withdrawals.
There is a good side of appreciation withdrawal. The actual capital invested is never touched and even a certain percentage of the appreciated amount keeps adding to the actually capital, making it grow. As the capital keeps growing, the returns keep growing too. Hence, the amount that can be withdraw actually keeps increasing over time.
Some Benefits of Systematic Withdrawal Plans
- The best part of Systematic Withdrawal Plans is that these investments allow inflationary corrections. This means that as inflation increases, the funds usually generate greater returns that can cover up the inflationary pressure.
- The actual investment amount is pretty liquid by nature. This means that whenever a large chunk of money is required for emergency situations, some funds can be sold off and the immediate funding requirements can be met.
- Of course there are undeniable tax benefits especially when the money is invested in high risk equity shares.
A few disadvantages of Systematic Withdrawal Plans
- These plans are good if the initial investment is very high. For small investments, the total return in absolute terms is not high and hence, the periodic withdrawals are either low (in case of appreciation withdrawal) or they quickly eat up the core fund invested (in case of fixed withdrawal).
- One one hand when high liquidity of the core investment fund is an advantage, it is also a disadvantage. Why so? That’s because when shares are sold off for meeting emergency funding requirements, less fund is available for investment and hence the annual return falls. Once the returns fall, your systematic withdrawal needs will not be fulfilled in case of appreciation withdrawal and in case of fixed withdrawal, your invested money gets eaten up even quicker.
- Market volatility is one of the greatest risks. In case of downswings, the returns may fall (This however depends on the fund you have selected. Some funds perform well even during market downswings). If returns fall you will end up being a loser irrespective of whether you have selected a fixed withdrawal plan or an appreciation withdrawal plan.
- Finally, in case of severe economic recessions, nothing can be guaranteed. This is actually true for all types of investments out there in market. If something similar to Great Depression of 1930s or something similar to US economic depression of 2008 happens then, there is absolutely nothing that you can do to keep your funds protected.
Staying prepared for devastating economic collapses
It always makes sense to stay prepared for devastating economic collapses, i.e. complete meltdown of global economy. If at all this happens, it will happen starting from US. The US dollar will fall from the status of reserve currency. Current economic scenario of the world says that the US dollar is already taking a hit and is getting weaker by the day, thanks to the Federal Bank’s monetary injection policy that came to life far the 2008 depression. Trillions of dollars printed out of thin air by the privately held Federal Bank of USA and were injected into the economy. This increased the US debt to a staggering $ 18 trillion dollars.
As of today, this debt is increasing rapidly every second. Adding to the problem is that the world is losing its faith on US as a global power. In fact, most of the world population (that includes a sizable number of US population too) thinks of US as the world’s greatest threat to global peace.
China on the other hand is poised to become world’s biggest economy in 2016 and US is feeling threatened by the same. This has forced US to extends its military expenses even more to stay strong in southern hemisphere. This has further increased US debt.
Further adding to the problem is ever increasing Russian aggression against US and NATO after the Crimean incident. US, UN and NATO imposed some severe sanctions of Russian economy and crippled its growth. As a result, Russia started trading its oil with Asian countries and ditched the petrodollar system in which it was decided that oil will be traded only and only in US dollars (or put in other words, the price of oil was decided only in US dollars). After the sanctions, Russia started not just selling her oil to other countries in their own currencies but also engaged in other bilateral trades where US dollar was completely ditched. Similar things happened in other countries like China, Iran, Venezuela, Australia, Brazil, Japan, Germany etc. Many countries have actually started reducing their dollar reserves.
In order to combat World Bank and IMF hegemony where US is the dominant power, another international bank called BRICS was formed recently with member countries being Brazil, Russia, India, China and South Africa.
So in short, world is losing its faith in US and that’s happening for good. There is however a problem. As US dollar is falling out of preference in many countries, US dollar is growing weaker and weaker and sometime in near future, there can be a day when US economy collapses completely. This will lead to a major global economic meltdown. The only thing that will not lose value is GOLD. Yes, the same old glittering yellow metal that we all love. Many experts actually think that GOLD will once again become world reserve currency that was replaced by US dollar back in 1913.
Good thing is that Gold never loses its value completely (though there may be a slight drop in gold prices at times) even in the face of global economic meltdowns. So, it is always wise to invest in gold and increase your gold reserves today alongside other investments. This is a time-tested investment tool that will help you recover even if you actually lose your paper currency investments.